Francesco Furlanetto, Norges Bank

"A tale of procyclical inequality: fact and implications"

Abstract

We analyze the level, the trend, and the cyclical patterns of consumption and income inequality in Norway, a modern welfare state. To achieve this, we utilize a panel dataset of card transactions and administrative income data, encompassing the entire population of Norwegian households from 2006 to 2018. Contrary to the increased inequality observed in the U.S., we find that both consumption and income inequality in Norway have remained relatively stable over time, albeit with considerable mobility within the distributions. Moreover, while pre-tax and transfer inequality appears largely disconnected from the business cycle in our data, we identify a pronounced pro-cyclical pattern in the inequality across households related to consumption and disposable income. This pro-cyclicality is evident both unconditionally and in response to major business cycle shocks. Finally, we show that the right tails of the income and consumption distributions exhibit excess cyclical sensitivity, while households in the lower percentiles remain relatively insulated from macroeconomic fluctuations. Interpreted through the lenses of heterogeneous agent models, the pro-cyclicality of inequality may explain why the Norwegian economy has been rather unaffected by economic recessions in recent decades: redistribution to low-income households with high MPC dampens the effects of recessionary shocks, thereby limiting their transmission to the aggregate economy.  Consequently, our findings offer new evidence on the role of distributional policies, as well as important implications for models with household heterogeneity.

Joint with Drago Bergholt and Lorenzo Mori.

For more information about Francesco Furlanetto and his interesting work - link to his website.

Contact person: Jeppe Druedahl