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Inequality and macroeconomic performance

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  • Jean-Paul Fitoussi

    (Observatoire français des conjonctures économiques)

  • Francesco Saraceno

    (Observatoire français des conjonctures économiques)

Abstract

This paper argues that although the crisis may have emerged in the financial sector, its roots are much deeper and lie in a structural change in income distribution that has been going on for the past three decades. The widespread increase of inequality depressed aggregate demand and prompted monetary policy to react by maintaining a low level of interest rate which itself allowed private debt to increase beyond sustainable levels. On the other hand the search for high-return investment by those who benefited from the increase in inequalities led to the emergence of bubbles. Net wealth became overvalued, and high asset prices gave the false impression that high levels of debt were sustainable. The crisis revealed itself when the bubbles exploded, and net wealth returned to normal level. We further argue that how the trend of increasing inequality interacted differently with policies and institutions, to yield radically different outcomes in the US and in the large European Union countries before the onset of the crisis.

Suggested Citation

  • Jean-Paul Fitoussi & Francesco Saraceno, 2010. "Inequality and macroeconomic performance," Sciences Po publications 2010-13, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/46mbanhapncmp6s9g2choh4pj
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    References listed on IDEAS

    as
    1. Jean-Paul Fitoussi & Eloi Laurent, 2009. "Macroeconomic and social policies in the EU 15: the last two decades," Working Papers hal-01066208, HAL.
    2. Giuseppe BERTOLA & Tito BOERI & Sandrine CAZES, 2000. "Employment protection in industrialized countries: The case for new indicators," International Labour Review, International Labour Organization, vol. 139(1), pages 57-72, March.
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    5. Jérôme Creel & Francesco Saraceno, 2008. "Automatic Stabilisation, Discretionary Policy and the Stability Pact," Working Papers hal-00973049, HAL.
    6. Jean-Paul Fitoussi & David Jestaz & Edmund S. Phelps & Gylfi Zoega, 2000. "Roots of the Recent Recoveries: Labor Reforms or Private Sector Forces?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 237-311.
    7. Cynamon Barry Z. & Fazzari Steven M., 2008. "Household Debt in the Consumer Age: Source of Growth--Risk of Collapse," Capitalism and Society, De Gruyter, vol. 3(2), pages 1-32, October.
    8. Fitoussi Jean Paul & Saraceno Francesco, 2010. "Europe: How Deep Is a Crisis? Policy Responses and Structural Factors Behind Diverging Performances," Journal of Globalization and Development, De Gruyter, vol. 1(1), pages 1-19, January.
    9. Ian Dew-Becker & Robert J. Gordon, 2005. "Where Did Productivity Growth Go? Inflation Dynamics and the Distribution of Income," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(2), pages 67-150.
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    Citations

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    Cited by:

    1. Karl Aiginger & Alois Guger, 2014. "Stylized Facts on the Interaction between Income Distribution and the Great Recession," Research in Applied Economics, Macrothink Institute, vol. 6(3), pages 157-178, September.
    2. Dosi, Giovanni & Fagiolo, Giorgio & Napoletano, Mauro & Roventini, Andrea, 2013. "Income distribution, credit and fiscal policies in an agent-based Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1598-1625.
    3. Emiliano Brancaccio & Giuseppe Fontana, 2013. "'Solvency rule' versus 'Taylor rule': an alternative interpretation of the relation between monetary policy and the economic crisis," Cambridge Journal of Economics, Oxford University Press, vol. 37(1), pages 17-33.
    4. Mauro Napoletano & Jean-Luc Gaffard & Zakaria Babutsidze, 2012. "Agent Based Models A New Tool for Economic and Policy Analysis: A New Tool for Economic and Policy Analysis," Sciences Po publications 3, Sciences Po.
    5. Giorgio Fagiolo & Andrea Roventini, 2012. "Macroeconomic Policy in DSGE and Agent-Based Models," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(5), pages 67-116.
    6. Hwan-Joo Seo & Han Sung Kim & Young Soo Lee, 2015. "Globalization and Labor Demand Elasticities: Empirical Evidence from Nine OECD Countries," Korean Economic Review, Korean Economic Association, vol. 31, pages 413-439.
    7. Dosi, Giovanni & Fagiolo, Giorgio & Napoletano, Mauro & Roventini, Andrea & Treibich, Tania, 2015. "Fiscal and monetary policies in complex evolving economies," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 166-189.
    8. Pasquale Tridico, 2012. "Italy from economic decline to the current crisis," Working Papers 0005, ASTRIL - Associazione Studi e Ricerche Interdisciplinari sul Lavoro.
    9. Pasquale Tridico & Riccardo Pariboni, 2018. "Inequality, financialization, and economic decline," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 41(2), pages 236-259, April.
    10. Virginia Maestri & Andrea Roventini, 2012. "Inequality and Macroeconomic Factors: A Time-Series Analysis for a Set of OECD Countries," Working Papers 34/2012, University of Verona, Department of Economics.
    11. Crespo Cuaresma, Jesus & Kubala, Jozef & Petrikova, Kristina, 2016. "Does income inequality affect aggregate consumption? Revisiting the evidence," Department of Economics Working Paper Series 4787, WU Vienna University of Economics and Business.
    12. Santo Milasi, 2014. "Top Income Shares and Budget Deficits," Rivista di Politica Economica, SIPI Spa, issue 1, pages 383-406, January-M.
    13. Virginia Maestri & Roventini, A. (Andrea), 2012. "GINI DP 30: Stylized Facts on Business Cycles and Inequality," GINI Discussion Papers 30, AIAS, Amsterdam Institute for Advanced Labour Studies.
    14. Philipp Poppitz, 2016. "Does self-perceptions and income inequality match?," IMK Working Paper 173-2016, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    15. Pasquale Tridico, "undated". "Economic policies and growth strategies after the crisis: different approaches in USA, Japan and EU," Working Papers 0015, ASTRIL - Associazione Studi e Ricerche Interdisciplinari sul Lavoro.
    16. jovanovic, branimir, 2015. "When is there a Kuznets curve?," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201550, University of Turin.
    17. Conrad Scheibe, 2016. "Fiscal Consolidations and Their Effects on Income Inequality," UCL SSEES Economics and Business working paper series 2016-4, UCL School of Slavonic and East European Studies (SSEES).
    18. repec:tek:journl:v:5:y:2016:i:1:p:71-107 is not listed on IDEAS
    19. Philip Arestis & Aurelie Charles & Giuseppe Fontana, 2015. "Power, Intergroup Conflicts and Social Stratification in the United States: What has the Global Crisis Taught us?," Review of Social Economy, Taylor & Francis Journals, vol. 73(4), pages 370-387, December.
    20. Alois Guger, 2012. "Einkommensverteilung als Krisenursache," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 38(2), pages 345-356.
    21. repec:clr:wugarc:y:2012:v:38i:2p:345 is not listed on IDEAS
    22. repec:clr:wugarc:y:2012:v:38i:2p:357 is not listed on IDEAS
    23. Anuradha Seth & Amr Ragab, 2012. "Macroeconomic Vulnerability in Developing Countries: Approaches and Issues," Working Papers 94, International Policy Centre for Inclusive Growth.
    24. David Castells-Quintana & Raul Ramos & Vicente Royuela, 2015. "Income inequality in European Regions: Recent trends and determinants," Review of Regional Research: Jahrbuch für Regionalwissenschaft, Springer;Gesellschaft für Regionalforschung (GfR), vol. 35(2), pages 123-146, October.
    25. Marin Geshkov, 2014. "The Effect of the World Economic Crisis on the Countries of the Balkan Region," Economic Alternatives, University of National and World Economy, Sofia, Bulgaria, issue 1, pages 108-125, January.

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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