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

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