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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.

Suggested Citation

  • Murat F. Iyigun & Ann L. Owen, 1997. "Income inequality and macroeconomic fluctuations," International Finance Discussion Papers 586, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:586
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    References listed on IDEAS

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    1. Benabou, Roland, 1994. "Human capital, inequality, and growth: A local perspective," European Economic Review, Elsevier, vol. 38(3-4), pages 817-826, April.
    2. Satya P. Das, 1993. "New Perspectives on Business Cycles," Books, Edward Elgar Publishing, number 120.
    3. Kevin M. Murphy & Andrei Shleifer & Robert Vishny, 1989. "Income Distribution, Market Size, and Industrialization," The Quarterly Journal of Economics, Oxford University Press, vol. 104(3), pages 537-564.
    4. Oded Galor & Joseph Zeira, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 35-52.
    5. 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 1333-1381, September.
    6. Kocherlakota, Narayana R., 1996. "Consumption, commitment, and cycles," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 461-474, June.
    7. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
    8. Deininger, K & Squire, L, 1996. "Measuring Income Inequality : A New Data-Base," Papers 537, Harvard - Institute for International Development.
    9. Perotti, Roberto, 1994. "Income distribution and investment," European Economic Review, Elsevier, vol. 38(3-4), pages 827-835, April.
    10. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
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    Keywords

    Income distribution ; Macroeconomics;

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