Minimum consumption and transitional dynamics in wealth distribution
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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