The Piketty Transition

48 Pages Posted: 3 Dec 2014

See all articles by Daniel Carroll

Daniel Carroll

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Eric R. Young

University of Virginia

Date Written: December 2, 2014

Abstract

We study the effects on inequality of a “Piketty transition” to zero growth. In a model with a worker-capitalist dichotomy, we show first that the relationship between inequality (measured as a ratio of incomes for the two types) and growth is complicated; zero growth can raise or lower inequality, depending on parameters. Extending our model to include idiosyncratic wage risk we show that growth has quantitatively negligible effects on inequality, and the effect is negative. Finally, following Piketty’s thought experiment, we study how the transition might occur without declining returns; here, we find inequality decreases substantially if financial innovation acts to reduce idiosyncratic return risk, and does not change much at all if it acts to increase capital’s share of income.

Keywords: inequality, heterogeneity, zero-growth

JEL Classification: D31, D33, D52, E21

Suggested Citation

Carroll, Daniel and Young, Eric R., The Piketty Transition (December 2, 2014). FRB of Cleveland Working Paper No. 14-32, Available at SSRN: https://ssrn.com/abstract=2533199 or http://dx.doi.org/10.2139/ssrn.2533199

Daniel Carroll (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Eric R. Young

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

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