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Masked Instability: Within-Sector Financial Risk in the Presence of Wealth Inequality

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  • Youngna Choi

    (Department of Mathematical Sciences, Montclair State University, Montclair, NJ 07043, USA
    Current address: 1 Normal Avenue, Montclair, NJ 07043, USA.)

Abstract

We investigate masked financial instability caused by wealth inequality. When an economic sector is decomposed into two subsectors that possess a severe wealth inequality, the sector in entirety can look financially stable while the two subsectors possess extreme financially instabilities of opposite nature, one from excessive equity, the other from lack thereof. The unstable subsector can result in further financial distress and even trigger a financial crisis. The market instability indicator, an early warning system derived from dynamical systems applied to agent-based models, is used to analyze the subsectoral financial instabilities. Detailed mathematical analysis is provided to explain what financial instabilities can arise amid seemingly stable economy and positive market data. The theoretical conjecture is verified by historical macroeconomic time series of the United States households among whom a substantial wealth inequality has been officially confirmed.

Suggested Citation

  • Youngna Choi, 2018. "Masked Instability: Within-Sector Financial Risk in the Presence of Wealth Inequality," Risks, MDPI, vol. 6(3), pages 1-15, June.
    • Handle: RePEc:gam:jrisks:v:6:y:2018:i:3:p:65-:d:154885
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    References listed on IDEAS

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    Cited by:

    1. Youngna Choi, 2022. "Economic Stimulus and Financial Instability: Recent Case of the U.S. Household," JRFM, MDPI, vol. 15(6), pages 1-25, June.
    2. Youngna Choi, 2019. "Borrowing Capacity, Financial Instability, And Contagion," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 22(01), pages 1-25, February.
    3. Filippo Gusella & Anna Maria Variato, 2021. "Financial Instability and Income Inequality: why the connection Minsky-Piketty matters for Macroeconomics," Working Papers - Economics wp2021_15.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.

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