A Stock-Flow Consistent Model of Emulation, Debt and Personal Income Inequality

Divergent trends in income and consumption inequality - with the first increasing substantially more than the latter - are an established stylized fact for the US economy of the last decades. The same time span experienced also a steady increase in household debt, plausibly not independently from the patterns in income distribution and consumption just mentioned. In this article we develop a stock-flow model that tries to replicate some of these dynamics. We emphasize the role played by changing behavioural attitudes towards consumption and demand for loans by households, by introducing an emulation mechanism that links a given quintile’s households desired consumption with the realized consumption of the immediately superior quintile. Furthermore, we leverage the data availability for consumption, income and wealth for quintiles of income distribution to estimate empirically those attitudes. The model, albeit simple and essential in its nature, is able to show the Janus-like faces of households' debt and emphasizes the predator-prey-like dynamics implied by a debt-let process, in which fresh borrowing increases aggregate demand and output, which feeds the ability to borrow and consume more; at the same time, the stock of accumulated debt "preys" on income due to the contractionary forces of the repayment mechanism. Through a simple and stylized representation of the multiple interactions between income distribution, consumption and debt, we also formalize and highlight how the benefits of a process of debt-led growth are asymmetrically distributed and reinforce the same detrimental tendencies in income distribution that led to the emergence of debt as a necessary engine of growth.