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Inequality and imbalances: a monetary union agent-based model

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Listed:
  • Alberto Cardaci
  • Francesco Saraceno

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

Abstract

Our paper investigates the impact of rising inequality in a two-country macroeconomic model with an agent-based household sector characterized by peer effects in consumption. In particular, the model highlights the role of inequality in determining diverging balance of payments dynamics within a currency union. Inequality may drive the two countries into different growth patterns: where peer effects in consumption interact with higher credit availability, rising income inequality leads to the emergence of a debt-led growth. Where social norms determine weaker emulation and credit availability is lower, an export-led regime arises. Eventually, a crisis emerges endogenously due to the sudden-stop of capital flows from the net lending country, triggered by the excessive risk associated with the dramatic amount of private debt accumulated by households in the borrowing country. Monte Carlo simulations for a wide range of calibrations confirm the robustness of our results.

Suggested Citation

  • Alberto Cardaci & Francesco Saraceno, 2019. "Inequality and imbalances: a monetary union agent-based model," SciencePo Working papers Main hal-03403551, HAL.
    • Handle: RePEc:hal:spmain:hal-03403551
    DOI: 10.1007/s00191-019-00611-4
    Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-03403551
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    References listed on IDEAS

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    1. Dosi, Giovanni & Fagiolo, Giorgio & Napoletano, Mauro & Roventini, Andrea, 2013. "Income distribution, credit and fiscal policies in an agent-based Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1598-1625.
    2. Ruo Chen & Gian Maria Milesi-Ferretti & Thierry Tressel, 2013. "External imbalances in the eurozone [Trade effects of the euro: evidence from sectoral data]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 28(73), pages 101-142.
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