Faculty of Economics and Business Administration Publications Database

Between Scylla and Charybdis: Income distribution, consumer credit and business cycles

Cardaci, A.
Saraceno, Francesco
Volume: 57
Number: 2
Pages: 953 - 971
Month: April
ISSN-Print: 0095-2583
Link External Source: Online Version
Year: 2019

We introduce a macroeconomic model with heterogeneous households and an aggregate banking sector in order to analyze the impact of rising income inequality under different credit scenarios. Growing inequality produces debt‐led consumption boom dynamics when the banking sector is characterized by a lower capital requirement and a higher willingness to lend. Instead, when inequality rises but the banking sector is highly regulated, aggregate demand and output fall. Our results also yield new insights on the appropriate fiscal policy reaction to stabilize the economy: acting on the progressivity of the tax system seems more effective than a proactive countercyclical fiscal policy.