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Macroeconomic Implications of Inequality and Income Risk
We explore the long-run relationship between income risk, inequality, and the macroeconomy in an overlapping-generations model in which households face uncertain streams of labor income and returns on their savings. To manage those risks, households can apportion their savings to a bond, whose return is safe and identical across households, and a productive asset, whose return is uncertain and can differ persistently across households. We find that greater polarization in households' labor income and returns on their savings generally accentuates households' demand for risk-free assets and ...