Inequality, Rare Events Shock, and Macroprudential Policy

We integrated frictional financial intermediation into a Tractable Heterogeneous Agents New Keynesian model. With the incorporation of income risk, the rare events trigger a sharper consumption decline due to precautionary saving. Aggregate rare events shock exacerbate income and consumption inequalities, particularly under counter-cyclical income risk scenarios. We underscore the crucial role of endogenous fluctuations in total credit, resulting from frictional financial intermediation, in shaping the distributional consequences of aggregate shocks. Counter-cyclical macroprudential policy, when applied, can potentially mitigate both income and consumption inequalities during rare events shock within this model