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Between Scylla and Charybdis: income distribution, consumer credit, and business cycles

Author

Listed:
  • Alberto Cardaci
  • Francesco Saraceno

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

Abstract

We introduce a macroeconomic model with heterogeneous households and an aggregate banking sector in order to analyze the impact of rising income inequality under different credit scenarios. Growing inequality produces debt‐led consumption boom dynamics when the banking sector is characterized by a lower capital requirement and a higher willingness to lend. Instead, when inequality rises but the banking sector is highly regulated, aggregate demand and output fall. Our results also yield new insights on the appropriate fiscal policy reaction to stabilize the economy: acting on the progressivity of the tax system seems more effective than a proactive countercyclical fiscal policy.

Suggested Citation

  • Alberto Cardaci & Francesco Saraceno, 2018. "Between Scylla and Charybdis: income distribution, consumer credit, and business cycles," Sciences Po Economics Publications (main) hal-03409051, HAL.
    • Handle: RePEc:hal:spmain:hal-03409051
    DOI: 10.1111/ecin.12749
    Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-03409051
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    Cited by:

    1. Andrea Borsato, 2022. "An agent-based model for Secular Stagnation in the USA: theory and empirical evidence," Journal of Evolutionary Economics, Springer, vol. 32(4), pages 1345-1389, September.
    2. Palagi, Elisa & Napoletano, Mauro & Roventini, Andrea & Gaffard, Jean-Luc, 2023. "An agent-based model of trickle-up growth and income inequality," Economic Modelling, Elsevier, vol. 129(C).
    3. Gräbner-Radkowitsch, Claudius & Heimberger, Philipp & Kapeller, Jakob & Landesmann, Michael & Schütz, Bernhard, 2022. "The evolution of debtor-creditor relationships within a monetary union: Trade imbalances, excess reserves and economic policy," Structural Change and Economic Dynamics, Elsevier, vol. 62(C), pages 262-289.
    4. Papadopoulos, Georgios, 2020. "Probing the mechanism: lending rate setting in a data-driven agent-based model," MPRA Paper 102749, University Library of Munich, Germany.
    5. Lilian N. Rolim & Carolina Troncoso Baltar & Gilberto Tadeu Lima, 2023. "Income distribution, productivity growth, and workers’ bargaining power in an agent-based macroeconomic model," Journal of Evolutionary Economics, Springer, vol. 33(2), pages 473-516, April.
    6. Alberto Cardaci & Francesco Saraceno, 2019. "Inequality and imbalances: a monetary union agent-based model," Journal of Evolutionary Economics, Springer, vol. 29(3), pages 853-890, July.
    7. George Vachadze, 2021. "Financial development, income and income inequality," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 16(3), pages 589-628, July.

    More about this item

    Keywords

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    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G01 - Financial Economics - - General - - - Financial Crises

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