Inequality, Financialisation and Economic Crises: An Agent-Based Macro Model

Alberto Cardaci () and Francesco Saraceno ()

Departmental Working Papers from Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano

Abstract: By means of a macroeconomic model with an agent-based house- hold sector and a stock-flow consistent structure, we analyse the impact 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 fiscal policy reaction, which, instead, only leads to a larger duration of the boom and bust cycle.

Keywords: Inequality; Household Debt; Credit Markets; Agent- Based Models; Stock-Flow Consistency (search for similar items in EconPapers)
JEL-codes: C63 D31 E21 E62 G01 (search for similar items in EconPapers)
Date: 2015-12-04
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Citations: View citations in EconPapers (5)

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