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Inequality, Financialisation and Credit Booms - a Model of Two Crises

Author

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  • Cardaci, Alberto

    (Lombardy Advanced School of Economic Research, Milan)

  • Saraceno, Francesco

    (LUISS School of European Political Economy)

Abstract

We develop a macroeconomic model with an agent-based household sector and a stock-flow consistent structure, in order to analyse the impact of rising income inequality on the likelihood of a debt crisis for diff erent institutional settings. In particular, we study how economic crises emerge in the presence of di fferent 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, a higher willingness to lend and lower perceptions of system risk result in greater instability and a debt-driven boom and bust cycle. The model allows us to replicate the credit-led consumption booms that paved the way for both the crisis of 1929 and the recent financial crisis. In addition, our paper yields a new insight on the appropriate policy reaction: tackling inequality by means of a more progressive tax system compensates for the rise in income disparities thereby stabilising the economy. This is a better solution compared to a more proactive fiscal policy which, instead, only leads to a larger duration of the boom and bust cycle.

Suggested Citation

  • Cardaci, Alberto & Saraceno, Francesco, 2016. "Inequality, Financialisation and Credit Booms - a Model of Two Crises," SEP Working Papers 2016/2, LUISS School of European Political Economy.
  • Handle: RePEc:ris:sepewp:2016_002
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    References listed on IDEAS

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    Cited by:

    1. Cardaci, Alberto, 2018. "Inequality, household debt and financial instability: An agent-based perspective," Journal of Economic Behavior & Organization, Elsevier, vol. 149(C), pages 434-458.
    2. Daniel Detzer, 2017. "Financialisation, Debt and Inequality: Export-led Mercantilist and Debt-led Private Demand Boom Economies in a Stock-flow consistent Model," Working Papers 2016-03, Universita' di Cassino, Dipartimento di Economia e Giurisprudenza.
    3. Alberto Cardaci & Francesco Saraceno, 2017. "Inequality and Imbalances : a Monetary Union Agent-Based Model," Working Papers hal-03455341, HAL.
    4. Botta, Alberto & Caverzasi, Eugenio & Russo, Alberto & Gallegati, Mauro & Stiglitz, Joseph E., 2021. "Inequality and finance in a rent economy," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 998-1029.
    5. 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.

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    More about this item

    Keywords

    Inequality; Household Debt; Credit Markets; Agent-Based Models; StockFlow 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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