Inequality and imbalances: a monetary union agent-based model

Abstract

Our paper investigates the impact of rising inequality in a two-country macroeconomic model with an agent-based household sector characterised by peer effects in consumption. In particular, the model highlights the role of inequality in determining diverging balance of payments dynamics within a currency union. Inequality may drive the two countries into different growth patterns: where peer effects in consumption interact with higher credit availability, rising income inequality leads to the emergence of a debt-led growth. Where social norms determine weaker emulation and credit availability is lower, an export-led regime arises. Eventually, a crisis emerges endogenously due to the sudden-stop of capital ows from the net lending country, triggered by the excessive risk associated to the dramatic amount of private debt accumulated by households in the borrowing country. Monte Carlo simulations for a wide range of calibrations confirm the robustness of our results.

Between Scylla and Charybdis: Income Distribution, Consumer Credit, and Business Cycles

“…In a companion paper (Cardaci and Saraceno 2017), we have extended this model to an open economy setting The rest of the paper is organized as follows: Section II introduces our macroeconomic model. Moreover, not only do we discuss the impact of inequality for different levels of financial deepening, but we also assess the effectiveness of different fiscal policy reactions.…”

“…3 3. In a companion paper (Cardaci and Saraceno 2017), we have extended this model to an open economy setting The rest of the paper is organized as follows: Section II introduces our macroeconomic model. Section III provides an analysis of model results obtained by means of Monte Carlo (MC) repetitions; we also check for the robustness of our results through sensitivity analysis.…”

“…In a companion paper (Cardaci and Saraceno ), we have extended this model to an open economy setting in order to account for the consequence of rising inequality within a currency union. The model features two countries with different intensities of peer effects and openness of the banking sector, thus resembling, broadly speaking, the main features of the core and the periphery of the Eurozone economy (including the presence of a kind of Target 2 mechanism).…”

Managerial overconfidence in capital structure decisions and its link to aggregate demand: An agent-based model perspective

“…[ 45 , 47 , 53 , 54 ]). One main limitation of such studies is that they concentrate on the financial fragility emerging out of the banking sector via inequality [ 52 , 55 ] monetary union imbalances [ 56 , 57 ], banking regulations (or the lack thereof), and banking behaviours [ 45 , 47 , 54 ]. None of these contributions explicitly consider financial market trading equity.…”

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“…[45,47,53,54]). One main limitation of such studies is that they concentrate on the financial fragility emerging out of the banking sector via inequality [52,55] monetary union imbalances [56,57], banking regulations (or the lack thereof), and banking behaviours [45,47,54]. None of these contributions explicitly consider financial market trading equity.…”