A Stock-Flow Consistent Model of Emulation, Debt, and Personal Income Inequality

Divergent trends in income and consumption inequality--with the first increasing substantially more than the latter--are an established, stylized fact for the US economy in the last decades. The same time period also experienced a steady increase in household debt, plausibly not independent from the patterns in income distribution and consumption as mentioned. In this article, we develop a stock-flow model that tries to replicate some of these dynamics. We emphasize the role played by changing behavioral attitudes toward consumption and demand for household loans by introducing an emulation mechanism that links the desired consumption for households of a given quintile with the realized consumption of the immediately superior quintile. Furthermore, we leverage the available data on income distribution quintile consumption, income, and wealth to estimate those attitudes empirically. The model, albeit simple and essential in nature, shows the Janus-like faces of household debt and emphasizes the predator-prey-like dynamics implied by a debt-led process, in which fresh borrowing increases aggregate demand and output, which feeds the ability to borrow and consume more; at the same time, the stock of accumulated debt "preys" on income due to the contractionary forces of the repayment mechanism. Through a simple and stylized representation of the multiple interactions between income distribution, consumption, and debt, we also formalize and highlight how the benefits of a process of debt-led growth are asymmetrically distributed and reinforce the same detrimental tendencies in income distribution that led to the emergence of debt as a necessary engine of growth.