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Dualism and Macroeconomic Volatility

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  • Philippe Aghion
  • Abhijit Banerjee
  • Thomas Piketty

Abstract

This paper develops a simple macroeconomic model that shows that combining capital market imperfections together with unequal access to investment opportunities across individuals can generate endogenous and permanent fluctuations in aggregate GDP, investment, and interest rates. Reducing inequality of access may be a necessary condition for macroeconomic stabilization. Moreover, countercyclical fiscal policies have a role to play: in our model savings are underutilized in slumps because of the limited debt capacity of potential investors. Therefore, the government should issue public debt during recessions in order to absorb those idle savings and finance investment subsidies or tax cuts for investors.

Suggested Citation

  • Philippe Aghion & Abhijit Banerjee & Thomas Piketty, 1999. "Dualism and Macroeconomic Volatility," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(4), pages 1359-1397.
    • Handle: RePEc:oup:qjecon:v:114:y:1999:i:4:p:1359-1397.
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    File URL: http://hdl.handle.net/10.1162/003355399556296
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