Between Scylla and Charybdis: income distribution, consumer credit, and business cycles

Alberto Cardaci and Francesco Saraceno ()
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Francesco Saraceno: OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po

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Abstract: We introduce a macroeconomic model with heterogeneous households and an aggregate banking sector in order to analyze the impact of rising income inequality under different credit scenarios. Growing inequality produces debt‐led consumption boom dynamics when the banking sector is characterized by a lower capital requirement and a higher willingness to lend. Instead, when inequality rises but the banking sector is highly regulated, aggregate demand and output fall. Our results also yield new insights on the appropriate fiscal policy reaction to stabilize the economy: acting on the progressivity of the tax system seems more effective than a proactive countercyclical fiscal policy.

Keywords: Income distribution; Consumer credit; Business cycles (search for similar items in EconPapers)
Date: 2018-12
Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-03409051
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Published in Economic Inquiry, 2018, 57 (2), ⟨10.1111/ecin.12749⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:spmain:hal-03409051

DOI: 10.1111/ecin.12749

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