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The role of the wealth distribution on output volatility

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  • Christian Ghiglino

    ()

  • Alain Venditti

Abstract

We explore the link between wealth inequality and business cycle fluctuations in a two-sector neoclassical growth model with endogenous labor and heterogeneous agents. Assuming that wealth inequality is described by the distribution of shares of capital, we show that in the most plausible situations wealth equality is a stabilizing factor. In particular, when wealth is Pareto distributed and preferences generate non-linear absolute risk tolerance indices, a rise in the Gini index may only be associated to a rise in volatility. When individual preferences are such that the individual absolute risk tolerance indices are linear, as with HARA utility, even a low level of taste heterogeneity ensures that a rise in inequality may not reduce volatility, and this independently of the wealth distribution. Finally, we note that such a clear result is at odd with the existing related literature.

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Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 653.

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Date of creation: 21 May 2008
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Handle: RePEc:esx:essedp:653

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  1. Timothy J. Kehoe & David K. Levine & Paul Romer, 1990. "Determinacy of Equilibrium in Dynamic Models with Finitely Many Consumers," Levine's Working Paper Archive 165, David K. Levine.
  2. Ghiglino, Christian, 2005. "Wealth inequality and dynamic stability," Journal of Economic Theory, Elsevier, vol. 124(1), pages 106-115, September.
  3. Hara, Chiaki & Huang, James & Kuzmics, Christoph, 2007. "Representative consumer's risk aversion and efficient risk-sharing rules," Journal of Economic Theory, Elsevier, vol. 137(1), pages 652-672, November.
  4. Cecilia Garcia-Penalosa & Stephen Turnovsky, 2003. "Production Risk and the Functional Distribution of Income in a Developing Economy: Tradeoffs and Policy Responses," Working Papers UWEC-2002-07-P, University of Washington, Department of Economics, revised Oct 2003.
  5. repec:ebl:ecbull:v:28:y:2004:i:18:p:a0 is not listed on IDEAS
  6. Piketty, Thomas & Banerjee, Abhijit & Aghion, Philippe, 1997. "Dualism and macroeconomic volatility," CEPREMAP Working Papers (Couverture Orange) 9720, CEPREMAP.
  7. Guiso, Luigi & Paiella, Monica, 2001. "Risk Aversion, Wealth and Background Risk," CEPR Discussion Papers 2728, C.E.P.R. Discussion Papers.
  8. Christian Ghiglino & Marielle Olszak-Duquenne, 2002. "The impact of heterogeneity on indeterminacy," Diskussionsschriften dp0213, Universitaet Bern, Departement Volkswirtschaft.
  9. Neri Salvadori, 2004. "Economic growth and distribution: on the nature and causes of the wealth of nations," Economics Bulletin, AccessEcon, vol. 28(18), pages A0.
  10. Caroli, Eve & Garcıa-Penalosa, Cecilia, 2002. "Risk aversion and rising wage inequality," Economics Papers from University Paris Dauphine 123456789/7307, Paris Dauphine University.
  11. Herrendorf, Berthold & Valentinyi, Akos & Waldmann, Robert, 2000. "Ruling Out Multiplicity and Indeterminacy: The Role of Heterogeneity," Review of Economic Studies, Wiley Blackwell, vol. 67(2), pages 295-307, April.
  12. Stefano Bosi & Thomas Seegmuller, 2006. "Optimal Cycles and Social Inequality: What Do We Learn from the Gini Index?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00194182, HAL.
  13. Nishimura, Kazuo & Venditti, Alain, 2007. "Indeterminacy in discrete-time infinite-horizon models with non-linear utility and endogenous labor," Journal of Mathematical Economics, Elsevier, vol. 43(3-4), pages 446-476, April.
  14. Ghiglino, Christian & Venditti, Alain, 2007. "Wealth inequality, preference heterogeneity and macroeconomic volatility in two-sector economies," Journal of Economic Theory, Elsevier, vol. 135(1), pages 414-441, July.
  15. Laurent Calvet & Jean-Michel Grandmont & Isabelle Lemaire, 2001. "Aggregation of Heterogenous Beliefs and Asset Pricing in Complete Financial Markets," Working Papers 2001-01, Centre de Recherche en Economie et Statistique.
  16. Christian Ghiglino & Marielle Olszak-Duquenne, 2001. "Inequalities and fluctuations in a dynamic general equilibrium model," Economic Theory, Springer, vol. 17(1), pages 1-24.
  17. Kazuo Nishimura & Alain Venditti & Makoto Yano, 2006. "Endogenous Fluctuations In Two-Country Models," The Japanese Economic Review, Japanese Economic Association, vol. 57(4), pages 516-532.
  18. Makoto Nirei & Wataru Souma, 2007. "A Two Factor Model Of Income Distribution Dynamics," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 53(3), pages 440-459, 09.
  19. Bosi, Stefano & Magris, Francesco & Venditti, Alain, 2005. "Competitive equilibrium cycles with endogenous labor," Journal of Mathematical Economics, Elsevier, vol. 41(3), pages 325-349, April.
  20. Becker, Robert A. & Tsyganov, Eugene N., 2002. "Ramsey Equilibrium in a Two-Sector Model with Heterogeneous Households," Journal of Economic Theory, Elsevier, vol. 105(1), pages 188-225, July.
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