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Income inequality and macroeconomic fluctuations

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  • Murat F. Iyigun
  • Ann L. Owen

Abstract

When per capita income is low, increases in income inequality make macroeconomic cycles less severe. We present a model in which access to credit is based on earnings potential. If low as well as middle income individuals are credit constrained, increases in income inequality lead to smaller fluctuations in aggregate consumption and output. Empirical evidence from cross-country data supports the view that greater income inequality causes lower variation of real consumption and output growth in low income countries. When per capita income is high, however, this effect is reversed.

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File URL: http://www.federalreserve.gov/pubs/ifdp/1997/586/default.htm
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File URL: http://www.federalreserve.gov/pubs/ifdp/1997/586/ifdp586.pdf
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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 586.

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Date of creation: 1997
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Handle: RePEc:fip:fedgif:586

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Related research

Keywords: Income distribution ; Macroeconomics;

References

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  1. Perotti, Roberto, 1994. "Income distribution and investment," European Economic Review, Elsevier, vol. 38(3-4), pages 827-835, April.
  2. Oded Galor & Joseph Zeira, 2013. "Income Distribution and Macroeconomics," Working Papers 2013-12, Brown University, Department of Economics.
  3. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
  4. Kevin M. Murphy & Andrei Shleifer & Robert Vishny, 1988. "Income Distribution, Market Size, and Industrialization," NBER Working Papers 2709, National Bureau of Economic Research, Inc.
  5. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
  6. Kocherlakota, Narayana R., 1996. "Consumption, commitment, and cycles," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 461-474, June.
  7. Benabou, Roland, 1994. "Human capital, inequality, and growth: A local perspective," European Economic Review, Elsevier, vol. 38(3-4), pages 817-826, April.
  8. Levy, Frank & Murnane, Richard J, 1992. "U.S. Earnings Levels and Earnings Inequality: A Review of Recent Trends and Proposed Explanations," Journal of Economic Literature, American Economic Association, vol. 30(3), pages 1333-81, September.
  9. Deininger, K & Squire, L, 1996. "Measuring Income Inequality : A New Data-Base," Papers 537, Harvard - Institute for International Development.
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