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Inequality and Macroeconomic Performance

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This paper argues that although the crisis may have emerged in the financial sector, its roots are much deeper and lie in a structural change in income distribution that has been going on for the past three decades. The widespread increase of inequality depressed aggregate demand and prompted monetary policy to react by maintaining a low level of interest rate which itself allowed private debt to increase beyond sustainable levels. On the other hand the search for high-return investment by those who benefited from the increase in inequalities led to the emergence of bubbles. Net wealth became overvalued, and high asset prices gave the false impression that high levels of debt were sustainable. The crisis revealed itself when the bubbles exploded, and net wealth returned to normal level. We further argue that how the trend of increasing inequality interacted differently with policies and institutions, to yield radically different outcomes in the US and in the large European Union countries before the onset of the crisis.

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Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2010-13.

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Date of creation: Jul 2010
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Handle: RePEc:fce:doctra:1013

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Keywords: Financial crisis; income inequality; US and EU comparison; household debt; aggregate demand;

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References

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  1. Jérôme Creel & Francesco Saraceno, 2008. "Automatic Stabilisation, Discretionary Policy and the Stability Pact," Sciences Po publications 2008-15, Sciences Po.
  2. Fitoussi Jean Paul & Saraceno Francesco, 2010. "Europe: How Deep Is a Crisis? Policy Responses and Structural Factors Behind Diverging Performances," Journal of Globalization and Development, De Gruyter, vol. 1(1), pages 1-19, January.
  3. Ian Dew-Becker & Robert J. Gordon, 2005. "Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income," NBER Working Papers 11842, National Bureau of Economic Research, Inc.
  4. Fitoussi, J-P & Jestaz, D. & Phelps, E.S. & Zoega, G., 2000. "Roots of the Recent Recoveries : Labor Reforms or Private-Sector Forces ?," Documents de Travail de l'OFCE 2000-04, Observatoire Francais des Conjonctures Economiques (OFCE).
  5. Jean-Paul Fitoussi & Eloi Laurent, 2009. "Macroeconomic and social policies in the EU 15 : the last two decades," Documents de Travail de l'OFCE 2009-20, Observatoire Francais des Conjonctures Economiques (OFCE).
  6. Krueger, Dirk & Perri, Fabrizio & Pistaferri, Luigi & Violante, Giovanni L, 2009. "Cross Sectional Facts for Macroeconomists," CEPR Discussion Papers 7582, C.E.P.R. Discussion Papers.
  7. Cynamon Barry Z. & Fazzari Steven M., 2008. "Household Debt in the Consumer Age: Source of Growth--Risk of Collapse," Capitalism and Society, De Gruyter, vol. 3(2), pages 1-32, October.
  8. Ian Dew-Becker & Robert J. Gordon, 2005. "Where Did Productivity Growth Go? Inflation Dynamics and the Distribution of Income," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(2), pages 67-150.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Inequality and Global Imbalances
    by Francesco Saraceno in Sparse Thoughts of a Gloomy European Economist on 2011-10-24 17:30:08
  2. Of Old Ideas about Inequality and Growth
    by Francesco Saraceno in Sparse Thoughts of a Gloomy European Economist on 2012-08-06 09:25:21
  3. Of Old Ideas about Inequality and Growth
    by Francesco Saraceno in Sparse Thoughts of a Gloomy European Economist on 2012-08-06 09:25:21
  4. Supporting Aggregate Demand in Fiscally Constrained Economies
    by Francesco Saraceno in Sparse Thoughts of a Gloomy European Economist on 2013-06-05 10:23:01
  5. Reduce Inequality to Fight Secular Stagnation
    by Francesco Saraceno in Sparse Thoughts of a Gloomy European Economist on 2013-12-22 11:38:51
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Cited by:
  1. Giovanni Dosi & Giorgio Fagiolo & Mauro Napoletano & Andrea Roventini, 2012. "Income distribution, credit and fiscal policies in an agent-based keynesian model," Sciences Po publications 2012-06, Sciences Po.
  2. Virginia Maestri & Roventini, A. (Andrea), 2012. "GINI DP 30: Stylized Facts on Business Cycles and Inequality," GINI Discussion Papers 30, AIAS, Amsterdam Institute for Advanced Labour Studies.
  3. Emiliano Brancaccio & Giuseppe Fontana, 2013. "'Solvency rule' versus 'Taylor rule': an alternative interpretation of the relation between monetary policy and the economic crisis," Cambridge Journal of Economics, Oxford University Press, vol. 37(1), pages 17-33.
  4. Pasquale Tridico, 2012. "Italy from economic decline to the current crisis," Working Papers 0005, ASTRIL - Associazione Studi e Ricerche Interdisciplinari sul Lavoro.
  5. Mauro Napoletano & Jean-Luc Gaffard & Zakaria Babutsidze, 2012. "Agent Based Models A New Tool for Economic and Policy Analysis: A New Tool for Economic and Policy Analysis," Sciences Po publications 3, Sciences Po.
  6. Virginia Maestri & Andrea Roventini, 2012. "Inequality and Macroeconomic Factors: A Time-Series Analysis for a Set of OECD Countries," Working Papers 34/2012, University of Verona, Department of Economics.
  7. Alois Guger, 2012. "Einkommensverteilung als Krisenursache," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 38(2), pages 345-356.
  8. Giorgio Fagiolo & Andrea Roventini, 2012. "Macroeconomic Policy in DSGE and Agent-Based Models," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(5), pages 67-116.
  9. Anuradha Seth & Amr Ragab, 2012. "Macroeconomic Vulnerability in Developing Countries: Approaches and Issues," Working Papers 94, International Policy Centre for Inclusive Growth.
  10. Santo Milasi, 2012. "Top Income Shares and Budget Deficits," CEIS Research Paper 249, Tor Vergata University, CEIS, revised 08 Aug 2013.
  11. Georg Feigl & Markus Marterbauer & Miriam Rehm, 2012. "Einkommensverteilung und Krise," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 38(2), pages 357-367.

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