Inequality and Macroeconomics

University of Toronto, 2021 Winter




  • Serdar Ozkan: serdar.ozkan[at]

  • Lectures: Lectures will be streamed online via Zoom synchronously on Wedensdays, 10am-12noon.

  • Office Hours: W 4-5pm or by appointment online via Zoom (or possibly in person).

Teaching Assistant

  • Alexander Hempel:

  • Office Hours: Thursdays 10-11am.

  • Tutorials: Wednesdays 9-10am. Again, tutorials will be streamed online via Zoom synchronously.

Course Description

Macroeconomics and inequality are a two-way street: Macroeconomic shocks and policies affect inequality and inequality affects macroeconomic aggregates. In this course we explore this rich interaction between inequality and the macroeconomy that characterizes our world. The goal is to introduce the frameworks (heterogenous agents models) for thinking about this interaction. At the core of these frameworks there will be a distribution of households that differ in wealth, productivity, and consumption-savings behavior. These models will be micro-founded, i.e., we will model macroeconomic aggregates as consequences of optimizing individual decisions. We will also test the predictions of these models with the data. The types of questions we will study include: What is the role of household heterogeneity in the transmission of monetary and fiscal policy? What are the distributional macroeconomic effects of Covid-19 pandemic? How do government policies affect inequality?

This is an advanced undergraduate course in macroeconomics. Thus, an intermediate level macroeconomic theory course is prerequisite. We will also use the language of mathematics to write down our models. A fair amount of knowledge of (dynamic) optimization techniques is also required. We will also get our hands dirty with micro-datasets and solving the models computationally.

Remote Learners

If you are a citizen of another country, and/or accessing your courses at the University of Toronto from a jurisdiction outside of Canada, please note that you may be subject to the laws of the country in which you are residing, or any country of which you have citizenship. The University of Toronto has a long-established commitment to freedom of expression, with this right enabled by an environment valuing respect, diversity, and inclusion. In your classes, you may be assigned readings, or discuss topics that are against the law in other jurisdictions. I encourage you to become familiar with any local laws that may apply to you and any potential impact on you if course content and information could be considered illegal, controversial, or politically sensitive. If you have any concerns about these issues, please contact me directly to discuss with them.

Textbooks and Papers

Unfortunately, there does not exist a textbook with the proper level and focus for this course. Instead, I will rely on journal articles and my own slides, for which I will benefit from teaching material of Greg Kaplan. There are a number of review articles that summarize the academic literature on heterogeneous agent macroeconomics that you will find useful:

  • Quadrini, V and J. V. Rios-Rull (2015) Inequality in Macroeconomics, Handbook of Income Distribution, 2B 1229-98

  • Heathcote, J., K. Storesletten and G. Violante (2009) Quantitative Macroeconomics with Heterogeneous Households, Annual Reviews of Economics, 1:319-54

  • Guvenen, F. (2011) Macroeconomics with Heterogeneity: A Practical Guide, Federal Reserve Bank of Richmond Economic Quarterly, 97 (3), 255-326

  • Attanasio, O. and G. Weber (2010) Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy, Journal of Economic Literature 48: 693-751

  • Krusell, Per, and Anthony A. Smith. "Quantitative macroeconomic models with heterogeneous agents." Econometric Society Monographs 41 (2006): 298.

  • Browning, M., L. P. Hansen, and J. J. Heckman (1999): “Micro data and general equilibrium models,” in Handbook of Macroeconomics, ed. by J. B. Taylor, and M. Woodford.


  • Assignments: 30% + Midterm: 30% + Final: 40%

  • The assignments must be handed in on the pre-specified dates (March 3 and April 23). No late submissions will be accepted. If a problem set is not handed in on time, for a justified and documented reason, the weight will shift to the final exam. 

  • The midterm test will be held during class time on a date to be determined later. There will be no make-up exam for the midterm test. If you provide appropriate and timely documentation for missing the midterm, the weight will be transferred to the final exam. 

  • The final exam will include all the material covered in the course. The final exam will be held at a date and location to be set by the University.

Class Schedule, Reading List and Slides

Week #1: Introduction and Why Should We Care About Inequality in Macroeconomics?

  • Slides

  • Imrohoroglu, Ayse. "Welfare costs of business cycles." The New Palgrave Dictionary of Economics, (2008).***

  • Storesletten, Kjetil, Chris I. Telmer, and Amir Yaron. "The welfare cost of business cycles revisited: Finite lives and cyclical variation in idiosyncratic risk." European Economic Review 45, no. 7 (2001): 1311-1339.

  • Ahn, SeHyoun, Greg Kaplan, Benjamin Moll, Thomas Winberry, and Christian Wolf. "When inequality matters for macro and macro matters for inequality." NBER macroeconomics annual 32, no. 1 (2018.

  • Krueger, D., K. Mitman and F. Perri (2016) Macroeconomics and Household Heterogeneity, Handbook of Macro.

  • Prescott E.C., The Transformation of Macroeconomic Policy and Research, 2004 Nobel Prize Lecture.

Weeks #2 and #3: Trends in Earnings Inequality

  • Slides

  • Per Krusell, Lee Ohanian, Jose-Victor Ríos-Rull and Gianluca Violante (2000). Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis, Econometrica***

  • Acemoglu, Daron, and David Autor. "Skills, tasks and technologies: Implications for employment and earnings." In Handbook of labor economics, vol. 4, pp. 1043-1171. Elsevier, 2011.***

  • Acemoglu, Daron (2002) “Technical Change, Inequality and the Labor Market.” Journal of Economic Literature.

Weeks #4 & 5: Decline in Labor Share

  • Slides

  • Elsby, Michael WL, Bart Hobijn, and Ayşegül Şahin. "The decline of the US labor share." Brookings Papers on Economic Activity 2013, no. 2 (2013): 1-63.

  • Karabarbounis, Loukas, and Brent Neiman. "The global decline of the labor share." The Quarterly journal of economics 129, no. 1 (2014): 61-103.

  • Autor, David, David Dorn, Lawrence F. Katz, Christina Patterson, and John Van Reenen. "The fall of the labor share and the rise of superstar firms." The Quarterly Journal of Economics 135, no. 2 (2020): 645-709.

  • Barkai, Simcha. "Declining labor and capital shares." The Journal of Finance 75, no. 5 (2020): 2421-2463.

  • De Loecker, Jan, Jan Eeckhout, and Gabriel Unger. "The rise of market power and the macroeconomic implications." The Quarterly Journal of Economics 135, no. 2 (2020): 561-644.

Weeks #5, #7, & #8: Lifecycle Income Inequality

  • Slides

  • Huggett, Mark, Gustavo Ventura, and Amir Yaron. "Sources of lifetime inequality." American Economic Review 101, no. 7 (2011): 2923-54.

  • Topel, Robert H., and Michael P. Ward. "Job mobility and the careers of young men." The Quarterly Journal of Economics 107.2 (1992): 439-479.

  • Hornstein, Andreas, Per Krusell, and Giovanni L. Violante. "Frictional wage dispersion in search models: A quantitative assessment." American Economic Review 101, no. 7 (2011): 2873-98.

Week #6: Midterm exam

Weeks #8, #9, & #10: Wealth Inequality and Permanent Income Hypothesis

Weeks #11 & #12: Standard Incomplete Market Models