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Inequality, Financialisation and economic crises : an agent-based model

Author

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  • Alberto Cardaci

    (Lombardy Advanced School of Economics Milan)

  • Francesco Saraceno

    (Observatoire français des conjonctures économiques (OFCE))

Abstract

By means of a macroeconomic model with an agent-based household sector and a stockflow consistent structure, we analyse the im-pact 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 fiscalpolicy 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 model," Sciences Po publications 2015-27, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/7qe4u05nfo9gcaran6h19ej29p
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    Cited by:

    1. Elisa Palagi & Mauro Napoletano & Andrea Roventini & Jean-Luc Gaffard, 2017. "Inequality, Redistributive Policies and Multiplier Dynamics in an Agent-based Model with Credit Rationing," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 3(3), pages 367-387, November.
    2. Papadopoulos, Georgios, 2019. "Income inequality, consumption, credit and credit risk in a data-driven agent-based model," Journal of Economic Dynamics and Control, Elsevier, vol. 104(C), pages 39-73.
    3. Tommaso Ciarli & André Lorentz & Marco Valente & Maria Savona, 2019. "Structural changes and growth regimes," Journal of Evolutionary Economics, Springer, vol. 29(1), pages 119-176, March.
    4. , Stone Center & Ranaldi, Marco, 2020. "Distributional Aspects of Economic Systems," SocArXiv n7wj4, Center for Open Science.
    5. Detzer, Daniel, 2016. "Financialisation, debt and inequality: Scenarios based on a stock flow consistent model," IPE Working Papers 64/2016, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
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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; Modern Monetary Theory
    • G1 - Financial Economics - - General Financial Markets

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