Investment Dynamics and Cyclical Redistribution

Nathan Zorzi (MIT)

February 3, 2020, 14:00–15:30


Room Auditorium 3

Job Market Seminar


Demand for durable goods and residential investment is strongly pro-cyclical. Workers employed in durable industries are imperfectly insured against these fluctuations, leading to distributional consequences during booms and busts. This paper studies the interaction between the cyclicality of durable demand and redistribution of labor income. I explore this feedback loop within a heterogeneous agent New Keynesian (HANK) model with multiple sectors and lumpy durable adjustment. Income redistribution emerges endogenously when labor mobility between sectors is limited. Crucially, lumpy adjustment at the micro level generates non-linearities at the macro level: the average marginal propensity to spend on durable goods varies with the size of income shocks. As a result, redistribution of labor incomes has aggregate effects. I find that the interaction between cyclical investment and redistribution amplifies the aggregate response of durable investment during booms and dampens it during recessions. The lumpy nature of durable adjustment entirely accounts for this non-linear effect.