Inequality, Financialisation and Economic Crisis : an Agent-Based Model

By means of a macroeconomic model with an agent-based house-hold sector and a stock-flow consistent structure, we analyse the impact of rising income inequality on the likelihood of a crisis for differ-ent institutional settings. In particular, we study how economic crises emerge in the presence of di erent credit conditions and policy reac-tions to rising income disparities. Our simulations show the relevanceof the degree of nancialisation of an economy. In fact, when inequal-ity grows, a Scylla and Charybdis kind of dilemma seems to arise: onthe one hand, low credit availability implies a drop in aggregate demand and output; on the other hand, relaxed credit constraints and ahigher willingness to lend result in greater financial instability and a debt-driven boom and bust cycle. We also point out that policy reac-tions play a key role: a real structural reform that tackles inequality,by means of a more progressive tax system, actually compensates for the rise in income disparities thereby stabilising the economy. Results also show that this is a better solution compared to a stronger fiscalpolicy reaction, which,instead, only leads to a larger duration of the boom and bust cycle.