Income Inequality and Macroeconomic Instability: A Stock-Flow Consistent Approach with Heterogeneous Agents

23 Pages Posted: 23 Sep 2014 Last revised: 24 Sep 2014

See all articles by Laura Carvalho

Laura Carvalho

Sao Paulo School of Economics - FGV

Corrado Di Guilmi

University of Technology Sydney (UTS) - UTS Business School

Date Written: September 1, 2014

Abstract

This paper introduces heterogeneous microeconomic behavior into a demand-driven stock-flow consistent model with endogenous credit creation, so as to study the joint dynamics of both the personal and the functional distribution of income, household debt and aggregate demand. The distinctive feature is in that the aggregation of heterogeneous agents is not performed numerically as in traditional agent-based models, but by means of an innovative analytical methodology, originally developed in statistical mechanics and recently imported into macroeconomics. Numerical and analytical results reveal that while boosting aggregate demand, a raise in the minimum wage and a reduction in wage inequality can also lead the economy toward more sustainable paths in both household debt and the degree of ’financialisation’. These results are shown to be the exact opposite to the observed responses of the economy to a raise in the interest rate charged on bank loans.

Keywords: Stock-flow consistent model, heterogeneous agents, master equation, income inequality, financial instability

JEL Classification: C63, D31, E16, E21, E25

Suggested Citation

Carvalho, Laura and Di Guilmi, Corrado, Income Inequality and Macroeconomic Instability: A Stock-Flow Consistent Approach with Heterogeneous Agents (September 1, 2014). CAMA Working Paper No. 60/2014, Available at SSRN: https://ssrn.com/abstract=2499977 or http://dx.doi.org/10.2139/ssrn.2499977

Laura Carvalho

Sao Paulo School of Economics - FGV ( email )

984, Perdizes
Sao Paulo, 05014-901
Brazil

Corrado Di Guilmi (Contact Author)

University of Technology Sydney (UTS) - UTS Business School ( email )

Sydney
Australia

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