Financial Complexity, Cycles and Income Inequality

45 Pages Posted: 10 Sep 2024

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

Thomas O. Zörner

Oesterreichische Nationalbank

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Abstract

We introduce a banking sector and heterogeneous agents in the dynamic overlapping generations model of Matsuyama et al. (2016). Our model captures the benefits and costs of an advanced banking system. While it allocates resources to productive activities, it can also hinder progress if it invests in projects that do not contribute to capital formation, and potentially triggering instabilities due to the emergence of cycles. Our intergenerational dynamic framework enables us to show that income inequality between agents increases during recessions, confirming empirical observations. Moreover, we identify both changes in production factor prices and the reallocation of agents across occupations as driving factors behind the increased inequality.

Keywords: Banks, Financial Innovation, Cycles, Income Inequality

Suggested Citation

Bougheas, Spiros and Commendatore, Pasquale and Gardini, Laura and Kubin, Ingrid and Zörner, Thomas O., Financial Complexity, Cycles and Income Inequality. Available at SSRN: https://ssrn.com/abstract=4951936 or http://dx.doi.org/10.2139/ssrn.4951936

Spiros Bougheas

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

Thomas O. Zörner (Contact Author)

Oesterreichische Nationalbank ( email )

Otto-Wagner-Platz 3, PO Box 61
Vienna,
1010 Vienna, A-1011
Austria

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