Financial Development, Cycles and Income Inequality in a Model with Good and Bad Projects

35 Pages Posted: 16 Dec 2022

See all articles by Spiros Bougheas

Spiros Bougheas

University of Nottingham - School of Economics

Pasquale Commendatore

University of Naples Federico II

Laura Gardini

University of Urbino Carlo Bo

Ingrid Kubin

Vienna University of Economics and Business

Date Written: 2022

Abstract

We introduce a banking sector and heterogeneous agents in the Matsuyama et al. (2016) dynamic over-lapping generations neoclassical model with good and bad projects. The model captures the benefits and costs of an advanced banking system which can facilitate economic development when allocates resources to productive activities but can also hamper progress when invests in projects that do not contribute to capital formation. When the economy achieves higher stages of development it becomes prone to cycles. We show how the disparity of incomes across agents de-pends on changes in both the prices of the factors of production and the reallocation of agents across occupations.

Keywords: banks, financial innovation, economic development, business cycles, income inequality

JEL Classification: E320, E440, G210

Suggested Citation

Bougheas, Spiros and Commendatore, Pasquale and Gardini, Laura and Kubin, Ingrid, Financial Development, Cycles and Income Inequality in a Model with Good and Bad Projects (2022). CESifo Working Paper No. 10135, Available at SSRN: https://ssrn.com/abstract=4303650 or http://dx.doi.org/10.2139/ssrn.4303650

Spiros Bougheas (Contact Author)

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

Pasquale Commendatore

University of Naples Federico II ( email )

Naples, Naples
Italy

Laura Gardini

University of Urbino Carlo Bo ( email )

Via I. Maggetti, 26
Urbino
Italy

Ingrid Kubin

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

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