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BETWEEN SCYLLA AND CHARYBDIS: INCOME DISTRIBUTION, CONSUMER CREDIT, AND BUSINESS CYCLES
Author(s) -
Cardaci Alberto,
Saraceno Francesco
Publication year - 2019
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12749
Subject(s) - economics , consumption (sociology) , fiscal policy , monetary economics , boom , debt , economic inequality , order (exchange) , inequality , yield (engineering) , income distribution , aggregate demand , business cycle , monetary policy , macroeconomics , finance , mathematical analysis , social science , materials science , mathematics , environmental engineering , sociology , metallurgy , engineering
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)