Income Redistribution, Consumer Credit, and Keeping Up With the Riches

53 Pages Posted: 10 Sep 2019

See all articles by Mathias Klein

Mathias Klein

German Institute for Economic Research (DIW Berlin)

Christopher Krause

Technical University of Dortmund

Date Written: July 23, 2019

Abstract

In this study, we set up a DSGE model with upward looking consumption comparison and show that consumption externalities are an important driver of consumer credit dynamics. Our model economy is populated by two different household types. Investors, who hold the economy’s capital stock, own the firms and supply credit, and workers, who supply labor and demand credit to finance consumption. Furthermore, workers condition their consumption choice on the investors’ level of consumption. We estimate the model and find a significant keeping up-mechanism by matching business cycle statistics. In reproducing credit moments, our proposed model significantly outperforms a model version in which we abstract from consumption externalities.

Keywords: income redistribution, consumer credit, relative consumption motive, business cycles

JEL Classification: E21, E32, E44

Suggested Citation

Klein, Mathias and Krause, Christopher, Income Redistribution, Consumer Credit, and Keeping Up With the Riches (July 23, 2019). DIW Berlin Discussion Paper No. 1816 (2019). Available at SSRN: https://ssrn.com/abstract=3450478 or http://dx.doi.org/10.2139/ssrn.3450478

Mathias Klein (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Christopher Krause

Technical University of Dortmund ( email )

Emil-Figge-Straße 50
Dortmund, 44227
Germany

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