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The role of the wealth distribution on output volatility

Author

Listed:
  • Christian Ghiglino

    (Department of Economics, University of Essex - University of Essex)

  • Alain Venditti

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

Abstract

We explore the link between wealth inequality and business cycle fluctuations in a two-sector neoclassical growth model with endogenous labor and heterogeneous agents. Assuming that wealth inequality is described by the distribution of shares of capital, we show that in the most plausible situations wealth equality is a stabilizing factor. In particular, when wealth is Pareto distributed and preferences generate non linear absolute risk tolerance indices, a rise in the Gini index may only be associated to a rise in volatility.When individual preferences are such that the individual absolute risk tolerance indices are linear, as with HARA utility, even a low level of taste heterogeneity ensures that a rise in inequality may not reduce volatility, and this independently of the wealth distribution.Finally, we note that such a clear result is at odd with the existing related literature.

Suggested Citation

  • Christian Ghiglino & Alain Venditti, 2008. "The role of the wealth distribution on output volatility," Working Papers halshs-00281379, HAL.
    • Handle: RePEc:hal:wpaper:halshs-00281379
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00281379
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