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Financial Complexity, Cycles and Income Inequality

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  • Bougheas, Spiros
  • Commendatore, Pasquale
  • Gardini, Laura
  • Kubin, Ingrid
  • Zörner, Thomas O.

Abstract

We introduce a banking sector and heterogeneous agents in the dynamic overlapping generations model of Matsuyama et al. (2016). Our model captures the benefits and costs of an advanced banking system. While it allocates resources to productive activities, it can also hinder progress if it invests in projects that do not contribute to capital formation, and potentially triggering instabilities due to the emergence of cycles. Our intergenerational dynamic framework, enables us to show that income inequality between agents increases during recessions, confirming empirical observations. Moreover, we identify both changes in production factor prices and the reallocation of agents across occupations as driving factors behind the increased inequality.

Suggested Citation

  • Bougheas, Spiros & Commendatore, Pasquale & Gardini, Laura & Kubin, Ingrid & Zörner, Thomas O., 2024. "Financial Complexity, Cycles and Income Inequality," Department of Economics Working Paper Series 361, WU Vienna University of Economics and Business.
    • Handle: RePEc:wiw:wus005:62095520
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    Keywords

    Banks; Financial Innovation; Cycles; Income Inequality;
    All these keywords.

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