Business cycle fluctuations and the distribution of consumption

This paper sheds new light on the interactions between business cycles and the consumption distribution. We use CEX consumption data and a factor model to characterize the cyclical dynamics of the consumption distribution. We first ensure that our approach closely matches business cycle fluctuations of consumption from the National Account. We then study the responses of the consumption distribution to TFP shocks and various uncertainty shocks. Importantly, we find that the right tail of the consumption distribution, comprised mostly of highly educated individuals, has a larger and quicker response than other parts of the distribution to shocks that drive cyclical fluctuations. We note that the cost of business cycle fluctuations, calculated using the full distribution of consumption, is larger than the cost found using aggregate consumption. Further, the shocks we analyze reduce consumption inequality on impact. (C) 2016 Elsevier Inc. All rights reserved.