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Inequality, Financialisation and Economic Crises: An Agent-Based Macro Model

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  • Alberto CARDACI
  • Francesco SARACENO

Abstract

By means of a macroeconomic model with an agent-based house- hold sector and a stock-flow consistent structure, we analyse the impact of rising income inequality on the likelihood of a crisis for different institutional settings. In particular, we study how economic crises emerge in the presence of different credit conditions and policy reactions to rising income disparities. Our simulations show the relevance of the degree of financialisation of an economy. In fact, when inequality grows, a Scylla and Charybdis kind of dilemma seems to arise: on the one hand, low credit availability implies a drop in aggregate demand and output; on the other hand, relaxed credit constraints and a higher willingness to lend result in greater financial instability and a debt-driven boom and bust cycle. We also point out that policy reactions play a key role: a real structural reform that tackles inequality, by means of a more progressive tax system, actually compensates for the rise in income disparities thereby stabilising the economy. Results also show that this is a better solution compared to a stronger fiscal policy reaction, which, instead, only leads to a larger duration of the boom and bust cycle.

Suggested Citation

  • Alberto CARDACI & Francesco SARACENO, 2015. "Inequality, Financialisation and Economic Crises: An Agent-Based Macro Model," Departmental Working Papers 2015-21, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
  • Handle: RePEc:mil:wpdepa:2015-21
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    Cited by:

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    3. Safarzyńska, Karolina & van den Bergh, Jeroen C.J.M., 2017. "Integrated crisis-energy policy: Macro-evolutionary modelling of technology, finance and energy interactions," Technological Forecasting and Social Change, Elsevier, vol. 114(C), pages 119-137.

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    More about this item

    Keywords

    Inequality; Household Debt; Credit Markets; Agent- Based Models; Stock-Flow Consistency;
    All these keywords.

    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
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • G01 - Financial Economics - - General - - - Financial Crises

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