EconPapers    
Economics at your fingertips  
 

Household debt: The missing link between inequality and secular stagnation

Gaël Giraud and Matheus Grasselli

Journal of Economic Behavior & Organization, 2021, vol. 183, issue C, 901-927

Abstract: How do inequality and growth evolve in the long run and why? We address this question by analyzing the interplay between household debt, growth and inequality within a monetary, stock-flow consistent framework. We first consider a Goodwin–Keen model where household consumption, rather than investment by firms, is the key behavioural driver for the dynamics of the economy. Whenever consumption exceeds current income, households can borrow from the banking sector. The resulting three dimensional dynamical system for wage share, employment rate, and household debt exhibits the characteristic asymptotic equilibria of the original Keen model, namely the analogue of Solow’s balanced-growth path, where all state variables converge to an interior point, in addition to deflationary equilibria with explosive debt and collapsing employment. We then extend this set-up by separating the household sector into workers and investors, obtaining a four-dimensional system with analogous types of asymptotic behaviour. Our main result is that long-run increasing inequality between these two classes of households occurs if and only if the system approaches one of the equilibria with unbounded debt ratios. More specifically, we find that one essential channel of increased inequality is the wealth transfer from workers to investors due to interest paid on debt from the former to the latter. Finally, when properly rewritten, the celebrated inequality r > g turns out to be a necessary condition for the asymptotic stability of long-run debt-deflation. Our findings shed new light on the relationships between fairness and efficiency, and have implications for public economic policy.

Keywords: Stock-flow consistency; Goodwin; Keen; Household debt; NAIRU; Inequality; Stagnation (search for similar items in EconPapers)
JEL-codes: C61 D63 E20 E32 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167268119300630
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:183:y:2021:i:c:p:901-927

DOI: 10.1016/j.jebo.2019.03.002

Access Statistics for this article

Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

More articles in Journal of Economic Behavior & Organization from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2021-06-30
Handle: RePEc:eee:jeborg:v:183:y:2021:i:c:p:901-927