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A0895
Title: Identifying and estimating the long-run effect of income distribution on the aggregate consumption Authors:  Yoosoon Chang - Indiana University (United States) [presenting]
Joon Park - Indiana University (United States)
Changsik Kim - Sungkyunkwan University (Korea, South)
Hwagyun Kim - Texas AM University (United States)
Abstract: The aim is to identify and estimate the long-run effect of income distribution on aggregate consumption. Permanent components of income and consumption are obtained by functional Beveridge-Nelson decomposition of U.S. Consumer Expenditure Survey data. From the permanent income distribution, we identify two factors, the level (aggregate) and the spread (redistribution), that affect permanent consumption. Longrun consumption is most positively affected by households with monthly earnings of around 2,000 dollars, households with lower income have negative effects on aggregate consumption, and those with 5,000 dollars or more respond little to income redistribution. Limited income sharing across households, high entry barriers, and nontrivial adjustment costs associated with both human and physical capital accumulation may contribute to the empirical findings. Taking the estimated long-run response function as the optimal behavior of households, counterfactual taxation exercises suggest that purely redistributive policies can increase the permanent component of aggregate consumption by 250\%.