In how far does inequality matter for the business cycle and vice versa? Using a Bayesian likelihood approach, we estimate a heterogeneous-agent New-Keynesian (HANK) model with incomplete markets and portfolio choice between liquid and illiquid assets. The model enlarges the set of shocks and frictions in Smets and Wouters (2007) by allowing for shocks to income risk and portfolio liquidity. We nd income risk to be an important driver of output and consumption. This makes US recessions more demand driven relative to the otherwise identical complete markets benchmark (RANK). The HANK model further implies that business cycle shocks and policy responses have signicantly contributed to the evolution of US wealth and income inequality.

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Link to paper: www.benjaminborn.de/files/BBL_2019.pdf