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Income inequality and macroeconomic stability in a New Keynesian model with limited asset market participation

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  • Giorgio Motta

    ()

  • Patrizio Tirelli

    ()

Abstract

We reconsider the issue of equilibrium determinacy under the limited asset market participation hypothesis in a medium-scale model which accounts for external consumption habits. This allows to characterize concern for relative consumption in the preferences of agents which are heterogeneous in their wealth holdings. We find that external habits and consumption inequality have mutually reinforcing adverse e¤ects on determinacy. We therefore uncover a causality link between long-run inequality and macroeconomic volatility in a New-Keynesian DSGE model. In our framework, redistributive polices targeting consumption inequality have beneficial implications for macroeconomic stability..

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File URL: http://dipeco.economia.unimib.it/repec/pdf/mibwpaper219.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 219.

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Length: 21 pages
Date of creation: Jan 2012
Date of revision: Jan 2012
Handle: RePEc:mib:wpaper:219

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Keywords: Limited Asset Market Participation; DSGE; Determinacy; Consumption Habits;

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  1. Coenen, Günter & Straub, Roland, 2005. "Does government spending crowd in private consumption? Theory and empirical evidence for the euro area," Working Paper Series 0513, European Central Bank.
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  14. Ascari, Guido & Colciago , Andrea & Rossi, Lorenza, 2011. "Limited asset market participation: does it really matter for monetary policy?," Research Discussion Papers 15/2011, Bank of Finland.
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