Inequality, household debt and financial instability: An agent-based perspective

Cardaci, Alberto

doi:10.1016/j.jebo.2018.01.010

Cited by 58 publications

(41 citation statements)

References 30 publications

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“…The result is a cascade of debt-financed status expenditures flowing downwards from the top of the income distribution; thus we use the term expenditure cascades hypothesis (ECH). Several authors have incorporated these assumptions in Post Keynesian macroeconomic models (Belabed et al 2013;Kapeller & Schütz 2014;Ryoo & Kim 2014;Cardaci 2014). A similar explanation of increased household borrowing posits that households (building on prospect theory) do not want to reduce consumption below levels reached in the past or below a minimum level.…”

Section: Introductionmentioning

confidence: 99%

Expenditure Cascades, Low Interest Rates or Property Booms? Determinants of Household Debt in OECD Countries

Stockhammer¹,

Wildauer

2018

RBE

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The past decades have witnessed a strong increase in household debt and high growth of private consumption expenditures in many countries. This paper empirically investigates four explanations: First, the expenditure cascades hypothesis argues that an increase in inequality induced lower income groups to copy the spending behaviour of richer peer groups and thereby drove them into debt ('keeping up with the Joneses'). Second, the housing boom hypothesis argues that increasing property prices encourage household spending and household borrowing due to wealth effects, eased credit constraints and the prospect of future capital gains. Third, the low interest hypothesis argues that low interest rates encouraged households to take on more debt. Fourth, the financial deregulation hypothesis argues that deregulation of the financial sector boosted credit supply. The paper tests these hypotheses by estimating the determinants of household borrowing using a panel of 11 OECD countries (198011 OECD countries ( -2011. Results indicate that real estate prices and low interest rates were the most important drivers of household debt. In contrast the data does not support the expenditure cascades hypothesis as a general explanation of debt accumulation across OECD countries. Our results are consistent with the financial deregulation hypothesis, but its explanatory power for the 1995-2007 period is low.

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Section: Introductionmentioning

confidence: 99%

Expenditure Cascades, Low Interest Rates or Property Booms? Determinants of Household Debt in OECD Countries

Stockhammer¹,

Wildauer

2018

RBE

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“…2 In fact, some of the works discussing the macroeconomic implications of inequality leave no room for household debt considerations. Similarly, Cardaci (2018) analyses the role of consumer credit as a determinant of the 2007 financial crisis in the United States. Dosi et al (2013) focus on the effect of inequality under different monetary and fiscal policies, showing that more unequal societies suffer from more severe business cycles oscillations and higher unemployment rates.…”

Section: A Related Literaturementioning

confidence: 99%

“…Instead of following the standard practice in the ABM literature, which consists in the arbitrary selection of a few values for one parameter at a time (see Cardaci 2018;Delli Gatti et al 2011;Dosi et al 2015), we have decided to introduce a wide random selection of the values of each parameter, while providing some limitations only to the boundaries of the random sample. Instead of following the standard practice in the ABM literature, which consists in the arbitrary selection of a few values for one parameter at a time (see Cardaci 2018;Delli Gatti et al 2011;Dosi et al 2015), we have decided to introduce a wide random selection of the values of each parameter, while providing some limitations only to the boundaries of the random sample.…”

Section: E Sensitivity Analysismentioning

confidence: 99%

“…This is explained by the rise of the household default rate which leaves a greater fraction of households out of the credit market. One of the major advantages of heterogeneous agent models-from more traditional versions, such as Aiyagari (1994) and, more recently, Kaplan, Moll, and Violante (2018), to the agentbased models (e.g., Cardaci 2018;Dosi et al 2016;Russo, Riccetti, and Gallegati 2016) that are related to this paper-is that they allow to analyze the distribution of key economic variables among heterogeneous individuals, which is often useful in order to shed some light on the microeconomic dynamics behind aggregate changes. In our case, it is interesting to investigate the change in the distribution of desired and actual consumption, in order to have a more comprehensive picture of the factors leading to falling GDP.…”

Section: B Scenario Analysismentioning

confidence: 99%

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

Cardaci

Saraceno

2018

Economic Inquiry

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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

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“…Other studies point to the threat to the financial system due to low financial literacy, which affects especially low-income population groups (Gathergood, 2012;Cardaci, 2018). Another risk is the significant ratio of mortgage loans to total debt, which is associated with rising property prices and the related crises (Jorda et al, 2016).…”

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confidence: 99%

The Impact of Regulatory Measures on the Development of Household Indebtedness

Rajl¹

2019

EFAJ

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The purpose of this contribution is to evaluate the regulatory measures of the Czech central bank within the context of financial consumer protection aimed at slowing down the growth of the mortgage market by introducing new recommendations to restrict LTV limits and other indicators. Households are taking advantage of the availability of mortgage loans in an environment of economic growth and low unemployment. However, the growth in real estate prices raises fears of an increase in systemic risk caused by the developing gap between the growth of household indebtedness and the growth in real estate prices. The paper recapitulates the main factors of the growth rate of household indebtedness and the extent to which the adopted recommendations are effective.

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Inequality, household debt and financial instability: An agent-based perspective

Cited by 58 publications

References 30 publications

Expenditure Cascades, Low Interest Rates or Property Booms? Determinants of Household Debt in OECD Countries

Expenditure Cascades, Low Interest Rates or Property Booms? Determinants of Household Debt in OECD Countries

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

The Impact of Regulatory Measures on the Development of Household Indebtedness

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