Inequality, Financialisation and Credit Booms - a Model of Two Crises
Alberto Cardaci and
Francesco Saraceno ()
No 2016/2, SEP Working Papers from LUISS School of European Political Economy
We develop a macroeconomic model with an agent-based household sector and a stock-flow consistent structure, in order to analyse the impact of rising income inequality on the likelihood of a debt crisis for diff erent institutional settings. In particular, we study how economic crises emerge in the presence of di fferent credit conditions and policy reactions to rising income disparities. Our simulations show the relevance of the degree of financialisation of an economy. In fact, when inequality grows, a Scylla and Charybdis kind of dilemma seems to arise: on the one hand, low credit availability implies a drop in aggregate demand and output; on the other hand, a higher willingness to lend and lower perceptions of system risk result in greater instability and a debt-driven boom and bust cycle. The model allows us to replicate the credit-led consumption booms that paved the way for both the crisis of 1929 and the recent financial crisis. In addition, our paper yields a new insight on the appropriate policy reaction: tackling inequality by means of a more progressive tax system compensates for the rise in income disparities thereby stabilising the economy. This is a better solution compared to a more proactive fiscal policy which, instead, only leads to a larger duration of the boom and bust cycle.
Keywords: Inequality; Household Debt; Credit Markets; Agent-Based Models; StockFlow Consistency (search for similar items in EconPapers)
JEL-codes: C63 D31 E21 E62 G01 (search for similar items in EconPapers)
Pages: 28 pages
New Economics Papers: this item is included in nep-cmp and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed
Downloads: (external link)
http://sep.luiss.it/sites/sep.luiss.it/files/WPSEP ... rdaci%20Saraceno.pdf Full text (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ris:sepewp:2016_002
Access Statistics for this paper
More papers in SEP Working Papers from LUISS School of European Political Economy Via di Villa Emiliani, 14, 00197 Rome, Italy. Contact information at EDIRC.
Bibliographic data for series maintained by Layla Tarar ( this e-mail address is bad, please contact ).