Income inequality and macroeconomic stability in a New Keynesian model with limited asset market participation

Giorgio Motta and Patrizio Tirelli

No 219, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: We reconsider the issue of equilibrium determinacy under the limited asset market participation hypothesis in a medium-scale model which accounts for external consumption habits. This allows to characterize concern for relative consumption in the preferences of agents which are heterogeneous in their wealth holdings. We find that external habits and consumption inequality have mutually reinforcing adverse e¤ects on determinacy. We therefore uncover a causality link between long-run inequality and macroeconomic volatility in a New-Keynesian DSGE model. In our framework, redistributive polices targeting consumption inequality have beneficial implications for macroeconomic stability..

Keywords: Limited Asset Market Participation; DSGE; Determinacy; Consumption Habits (search for similar items in EconPapers)
JEL-codes: E52 E63 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2012-01, Revised 2012-01
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:mib:wpaper:219

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