Does inequality matter for demand shocks?

This article studies how income inequality shapes aggregate dynamics in response to demand shocks in a tractable heterogeneous-agent New Keynesian (THANK) model. Whether inequality affects aggregate dynamics depends on the stabilizing role of monetary policy. When monetary policy is unconstrained, dividend-based cyclical inequality generates dynamics that closely resemble those in the no-inequality benchmark, while transfer-based long-run inequality has a dampening effect. However, when the zero lower bound binds, both cyclical and long-run inequality amplify the contractionary effects of demand shocks.