BETWEEN SCYLLA AND CHARYBDIS: INCOME DISTRIBUTION, CONSUMER CREDIT, AND BUSINESS CYCLES

Alberto Cardaci · Francesco Saraceno

10 citations0/0 files storedEconomic Inquiry

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Economic Theory and Policy Monetary Policy and Economic Impact Economic theories and models

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)

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1936The General Theory of Employment, Interest and Money.1975Clausulas comparativas do portugues 1994Uninsured Idiosyncratic Risk and Aggregate Saving 2011Top Incomes in the Long Run of History 1955Alternative Theories of Distribution 2022World Inequality Report 2022 2018Monetary Policy According to HANK 2018The World Inequality Report

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