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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," SciencePo Working papers 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. 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.

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