Wealth inequality and macroeconomic volatility in two-sector economies

We explore the link between wealth inequality and macroeconomic volatility in a two-sector neoclassical growth model with heterogeneous agents. The model has a unique aggregate steady state which is independent of the level of inequality. However, whenever preferences do not exhibit hyperbolic absolute risk aversion, wealth heterogeneity may affect the volatility of output. In particular, we show that when consumers have identical preferences and absolute risk tolerance is a strictly convex function, inequality is a factor that favors macroeconomic volatility. In the opposite case, equality favors macroeconomic volatility. Weak empirical evidence suggests that risk tolerance is concave in which case our finding would imply that inequality tends to remove fluctuations.