At the zero lower bound, the New Keynesian model predicts that output and inflation collapse to implausibly low levels and that government spending and forward guidance have implausibly large effects. To resolve these anomalies, we introduce wealth into the utility function; the justification is that wealth is a marker of social status, and people value status. Since people partly save to accrue social status, the Euler equation is modified. As a result, when the marginal utility of wealth is sufficiently large, the dynamical system representing the zero-lower-bound equilibrium transforms from a saddle to a source, which resolves all the anomalies.

This paper studies the evolution of income concentration in Japan from 1886 to 2005 by constructing long-run series of top income shares and top wage income shares, using income tax statistics. We find that (i) income concentration was extremely high throughout the pre-WWII period during which the nation underwent rapid industrialization; (ii) a drastic de-concentration of income at the top took place in 1938–1945; (iii) income concentration remained low during the rest of the century but shows some sign of increase in the last decade; and (iv) top income composition in Japan has shifted dramatically from capital income to employment income over the course of the twentieth century. We attribute the precipitous fall in income concentration during WWII primarily to the collapse of capital income due to wartime regulations and inflation. We argue that the change in the institutional structure under the occupational reforms made the one-time income de-concentration difficult to reverse. In contrast to the sharp increase in wage income inequality observed in the United States since 1970, the top wage income shares in Japan have remained relatively stable over the last thirty years. We show that the change in technology or tax policies alone cannot account for the comparative experience of Japan and the United States. Instead we suggest that institutional factors such as internal labor markets and union structure are important determinants of wage income concentration.