Financial Complexity, Cycles and Income Inequality

Spiros Bougheas, Pasquale Commendatore, Laura Gardini, Ingrid Kubin and Thomas O. Zörner

No 361, Department of Economics Working Paper Series from WU Vienna University of Economics and Business

Abstract: We introduce a banking sector and heterogeneous agents in the dynamic overlapping generations model of Matsuyama et al. (2016). Our model captures the benefits and costs of an advanced banking system. While it allocates resources to productive activities, it can also hinder progress if it invests in projects that do not contribute to capital formation, and potentially triggering instabilities due to the emergence of cycles. Our intergenerational dynamic framework, enables us to show that income inequality between agents increases during recessions, confirming empirical observations. Moreover, we identify both changes in production factor prices and the reallocation of agents across occupations as driving factors behind the increased inequality.

Keywords: Banks; Financial Innovation; Cycles; Income Inequality (search for similar items in EconPapers)
Date: 2024-04
New Economics Papers: this item is included in nep-ban, nep-dge, nep-fdg and nep-ppm
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