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

19 Pages Posted: 27 Feb 2019

See all articles by Alberto Cardaci

Alberto Cardaci

Goethe University Frankfurt

Francesco Saraceno

Observatoire Francais des Conjonctures Economiques, Paris (OFCE)

Date Written: April 2019

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 Classification: C63, D31, E62, G01

Suggested Citation

Cardaci, Alberto and Saraceno, Francesco, Between Scylla and Charybdis: Income Distribution, Consumer Credit, and Business Cycles (April 2019). Economic Inquiry, Vol. 57, Issue 2, pp. 953-971, 2019, Available at SSRN: https://ssrn.com/abstract=3342658 or http://dx.doi.org/10.1111/ecin.12749

Alberto Cardaci (Contact Author)

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Francesco Saraceno

Observatoire Francais des Conjonctures Economiques, Paris (OFCE) ( email )

69 Quai d'Orsay
75007 Paris
France

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