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

Listed author(s):
  • Alberto Cardacci

    (Lombardy Advanced School of Economics Milan)

  • Francesco Saraceno

    (Observatoire français des conjonctures économiques)

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.

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Paper provided by Sciences Po in its series Sciences Po publications with number 2015-27.

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Date of creation: Nov 2015
Handle: RePEc:spo:wpmain:info:hdl:2441/7qe4u05nfo9gcaran6h19ej29p
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  15. Christian A. Belabed & Thomas Theobald & Till van Treeck, 2013. "Income Distribution and Current Account Imbalances," IMK Working Paper 126-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
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