Income Redistribution, Consumer Credit, and Keeping up with the Riches

Mathias Klein and Christopher Krause

No 1816, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: In this study, we set up a DSGE model with upward looking consumption comparison and show that consumption externalities are an important driver of consumer credit dynamics. Our model economy is populated by two different household types. Investors, who hold the economy’s capital stock, own the firms and supply credit, and workers, who supply labor and demand credit to finance consumption. Furthermore, workers condition their consumption choice on the investors’ level of consumption. We estimate the model and find a significant keeping up-mechanism by matching business cycle statistics. In reproducing credit moments, our proposed model significantly outperforms a model version in which we abstract from consumption externalities.

Keywords: Income redistribution; consumer credit; relative consumption motive; business cycles (search for similar items in EconPapers)
JEL-codes: E21 E32 E44 (search for similar items in EconPapers)
Pages: 87 p.
Date: 2019
New Economics Papers: this item is included in nep-dge and nep-mac
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Related works:
Journal Article: Income Redistribution, Consumer Credit, and Keeping Up with the Riches (2020)
Working Paper: Income redistribution, consumer credit, and keeping up with the Riches (2015)
Working Paper: Income Redistribution, Consumer Credit,and Keeping up with the Riches (2014)
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