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Inequality, Financialisation and Economic Crisis: an Agent-Based Model

Alberto Cardaci and Francesco Saraceno ()
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Alberto Cardaci: Lombardy Advanced School of Economic Research, Milan

No 2015-27, Documents de Travail de l'OFCE from Observatoire Francais des Conjonctures Economiques (OFCE)

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 differ-ent institutional settings. In particular, we study how economic crises emerge in the presence of di erent credit conditions and policy reac-tions to rising income disparities. Our simulations show the relevanceof the degree of nancialisation of an economy. In fact, when inequal-ity grows, a Scylla and Charybdis kind of dilemma seems to arise: onthe one hand, low credit availability implies a drop in aggregate demand and output; on the other hand, relaxed credit constraints and ahigher willingness to lend result in greater financial instability and a debt-driven boom and bust cycle. We also point out that policy reac-tions 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 fiscalpolicy 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: 2015-11
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