Between Scylla and Charybdis: Income Distribution, Consumer Credit, and Business Cycles

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. (JEL C63, D31, E62, G01) * We are particularly grateful to

An agent-based model of trickle-up growth and income inequality

“…For previous agent-based models including this social dimension of consumption seeAversi et al (1999),Axtell (2006),Guerini et al (2018),Cardaci and Saraceno (2019),Botta et al (2019) andRengs and Scholz-Wäckerle (2019).6 This is in line with models with credit rationing based on either non-observability of labor input, i.e. moral hazard(Aghion and Bolton, 1997, Piketty, 1997, Aghion et al, 1999, physical output Newman, 1993, Galor andZeira, 1993), or individual ability(Jaffee and Stiglitz, 1990).…”

An agent-based model of trickle-up growth and income inequality

“…5 For previous agent-based models including this social dimension of consumption see Aversi et al (1999), Axtell (2006), Guerini et al (2018), Cardaci and Saraceno (2019), Botta et al (2019) and Rengs and Scholz-Wäckerle (2019).…”

“…The introduction of the above effective demand channel constitutes a novelty with respect to previous theoretical works on inequality and growth, as it implies that inequality may not only impact on the income potential of an economy, but also on the coordination between demand and supply. In that respect, our work is linked to the seminal works highlighting the role played by income distribution in ensuring "natural growth" (see Kaldor, 1955, Cardaci, 2018, Caiani et al, 2019, Cardaci and Saraceno, 2019, Botta et al, 2019. In these works higher levels of either personal or functional income inequality generally worsen macroeconomic conditions.…”

Credit - inequality nexus: the role of natural resources

“…In the United States, subsidised housing lending was instituted to improve the situation of low-and middle-income earners (Malinen, 2016). In a bid to contain depressed aggregated demand, central banks may cut interest rates, which simultaneously trigger the search for high-yield investments by high-income earners, driving asset bubbles through the accumulation of private debt (Stockhammer, 2015;Fitoussi & Saraceno, 2010;Cardaci & Saraceno, 2019). From the theoretical perspective, natural resources can aid the credit extension by the financial sector if the natural resources rents are deposited in the domestic economy (Beck & Poelhekke, 2022).…”