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Growing Inequality, Financial Fragility,
and Macroeconomic Dynamics:
An Agent Based Model
Alberto Russo
1
, Luca Riccetti
2
, and Mauro Gallegati
1
1
Universita Politecnica delle Marche, Ancona, Italy
alberto.russo@univpm.it
http://sites.google.com/site/albrusso76/
2
Universita “La Sapienza”, Roma, Italy
Abstract.
Our aim is to analyse the interplay between growing inequal-
ity and financial fragility in a complex macroeconomic system. In order
to do this, we propose a macroeconomic microfounded framework with
heterogeneous agents in which households, firms, and banks interact ac-
cording to decentralised matching processes. The main result is that
growing inequality leads to more macroeconomic volatility, increasing
the likelihood of observing large unemployment crises.
Keywords:
agent-based macroeconomics, business cycle, crisis, consump-
tion, inequality.
1
Introduction
We aim at investigating the interplay between growing inequality and financial
fragility in a complex macroeconomic system. In last decades, many advanced
economies experimented a rise of income and wealth inequality. For instance, a
decline of the labour share has occurred in advanced economies (about 10% in
Europe and Japan and 3-4% in Anglo-Saxon countries since 1980), especially
in unskilled sectors ([7]). The decrease of the labour share may cause a lack of
effective demand in a context of growing inequality. Moreover, income inequality
was relatively low and roughly stable before the 1980s, then it has drastically
increased. Actually, consumer credit and other forms of indebtedness have pre-
vented this to happen for a while, but at the cost of an increasing financial
instability and a following large crisis.
Regarding the rise of inequality, economists proposed alternative interpreta-
tions: from high vs. low skilled workers (and then the economic impact of tech-
nological progress on labour market dynamics), to the role of labour flexibility
and globalisation, and so on. In this paper we focus on the macroeconomic conse-
quences of raising inequality, and in particular on the possible lack of aggregate
demand due to an “excessive” saving of rich and a “too-low” consumption of
poor. “Excessive” saving could be due to a precautionary motive, as showed in
heterogeneous-agent models with incomplete markets and liquidity constraints
