Indebted Demand in a Two Period Consumption-Saving Model

Joshua Brault and Hashmat Khan ()

No 21-13, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: We construct a two period consumption-saving model with two agents where rising income inequality leads to declining equilibrium rates of interest, rising debt levels, and lower future aggregate demand. Importantly, our model does not rely on non-homothetic preferences to generate these outcomes. Instead, borrowers face a borrowing constraint which eases when income inequality increases. This feature is supported by the stylized fact that consumer credit and inequality have strongly co-moved and risen in the U.S. since the mid-1980s.

Keywords: Income inequality; Borrowing Constraint; Interest rate; Indebted demand (search for similar items in EconPapers)
JEL-codes: E21 E43 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2021-12-01, Revised 2022-01-05
New Economics Papers: this item is included in nep-des, nep-fdg, nep-his and nep-mac
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Published: Carleton Economics Papers

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Persistent link: https://EconPapers.repec.org/RePEc:car:carecp:21-13

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