Inequality, Myopia, and the Business Cycle

Lorenzo Carbonari and Filippo Maurici ()
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Filippo Maurici: Department of Political Sciences, Università Roma Tre, Italy

Working Paper series from Rimini Centre for Economic Analysis

Abstract: This work examines two economies that are identical except for their interpretation of a transitory shock in inequality, eventually affecting the aggregate Total Factor Productivity (TFP). The population consists of homogeneous workers and credit-constrained heterogeneous entrepreneurs. Along the transition path, compared with the case of perfect foresight, myopia: (i) sharply increases workers’ consumption and (ii) reduces aggregate wealth. No expectation rule, whether myopic or perfect foresight, is unambiguously dominant in terms of output, consumption, or welfare more broadly. We prove that, under myopic expectations, transitory shocks in inequality can lead to dynamic (local) instability.

Keywords: myopia; inequality; stability; heterogeneous agents; transition dynamics (search for similar items in EconPapers)
JEL-codes: D83 D84 E22 E70 (search for similar items in EconPapers)
Date: 2024-12
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:24-19

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