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a higher credit constraint implies a lower leverage, because firms are not able to
reach their desired leverage. The wage share is statistically different between the
two Monte Carlo, but the difference is economically not significant. The similar
wage share between the two Monte Carlo experiments implies a similar pressure
to increase wages and thus similar effets on price dynamics. Indeed, the inflation
rate is the same in both cases.
Instead, the public deficit is slightly lower in the case with
c
3
=0
.
5, given
that in this case there are richer households and we assume the presence of a 5%
tax rate on wealth (only above a certain wealth level). However, in both cases
the public deficit remains on admissible values (compared to GDP).
To summarise, we observe a negative impact on the economy of a propensity to
consume that decreases with wealth (that also creates an economic system with
larger wealth inequality). Indeed, in this case the business cycle is “larger” and we
count a higher number of simulations in which we detect large unemployment
crises. This riskier economic environment with a stronger volatility implies a
larger number of firm defaults, a higher mean interest rates, and a higher mean
credit constraint.
4 Concluding Remarks
“While several authors have noticed that there might be a link between rising in-
equality and the crisis ([11], [14], [8]), there is as of yet little systematic analysis”
([12]). We proposed an analysis of the effects of wealth inequality on macroe-
conomic dynamics in an economy composed of heterogeneous households, firms,
banks, and two policy makers, that is the government and the central bank. The
main result is that growing inequality leads to more macroeconomic volatility,
increasing the likelihood of observing large unemployment crises. However, this
is just a first step towards a complex quest. Our aim is to further extend our
analysis in order to understand the consequences of growing inequality on the
evolution of the macroeconomy.
For instance, we may consider the introduction of credit consumption through
which the saving of rich can finance the consumption of poor. But, in a context of
growing inequality, debt accumulation may increase financial fragility, spreading
in the system through credit interlinkages ([2]), eventually leading to a financial
collapse. So finance may postpone the crisis due to the lack of aggregate demand,
but it also creates the bases for a later financial crisis. However, we leave this
complex topic for future works.
References
1. Aiyagari, S.R.: Uninsured idiosyncratic risk and aggregate saving. Quarterly Jour-
nal of Economics 109(3), 659-684 (1994)
2. Delli Gatti, D., Gallegati, M., Greenwald, B., Russo, A., Stiglitz, J.E.: The finan-
cial accelerator in an evolving credit network. Journal of Economic Dynamics and
Control 34(9), 1627-1650 (2010)
