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Minimum consumption and transitional dynamics in wealth distribution

  • Alvarez-Pelaez, Maria J.
  • Diaz, Antonia

This paper investigates the evolution of wealth distribution in a one sector growth model along its transition path. A key feature of the model is that a household's consumption cannot fall below a positive level each period. This requirement introduces a positive association between the intertemporal elasticity of substitution and household wealth. Households only differ in their initial holdings of capital. The model is calibrated to match some key statistics of the US economy. The level of inequality in the wealth distribution of our artificial economy has a n inverted Ushape. The level of wealth inequality and its evolution resembles that of the US economy. However, our model illustrates that the existence of a Kuznets curve is very sensitive tothe sources of growth: whether it is driven by productivity growth or capital accumulation. Additionally, our model predicts an upsurge in wealth inequality following the productivity slowdown in the 1970's.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 52 (2005)
Issue (Month): 3 (April)
Pages: 633-667

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Handle: RePEc:eee:moneco:v:52:y:2005:i:3:p:633-667
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  18. Mark Huggett & Gustavo Ventura, 1995. "Understanding why high income households save more than low income households," Discussion Paper / Institute for Empirical Macroeconomics 106, Federal Reserve Bank of Minneapolis.
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  21. Javier Díaz-Giménez & Vincenzo Quadrini & José-Víctor Ríos-Rull, 1997. "Dimensions of inequality: facts on the U.S. distributions of earnings, income, and wealth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-21.
  22. Atkinson, A-B, 1996. "Bringing Income Distribution in from the Cold," Economics Papers 117, Economics Group, Nuffield College, University of Oxford.
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  27. Deininger, Klaus & Squire, Lyn, 1998. "New ways of looking at old issues: inequality and growth," Journal of Development Economics, Elsevier, vol. 57(2), pages 259-287.
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