What is it about?

This paper offers a contribution to the understanding of the interactions between finance, instability and inequality. We investigate the ways income and wealth inequality may have influenced the development of modern financial systems in those advanced economies (such as the US) in which securitization (emblematic of the more general class of com- plex structured financial products) has played an important role, and how those financial systems have in turn affected income and wealth distribution. We do this by elaborating on a hybrid Agent-Based Stock-Flow-Consistent (AB-SFC) macroeconomic model, encom- passing heterogeneous (i.e. households) and aggregate sectors. Our findings suggest that while higher levels of credit supply coming with securitization may lead in the short run to higher economic growth, it comes at a price: a more unequal and financially and eco- nomically unstable economic system. The model is able to reproduce some stylized facts related to credit cycles, including the relationship between non-performing loans (NPLs) and GDP growth and the evolution of income inequality during crises. Moreover, we per- form a battery of policy experiments and find that a lower and more progressive taxation on households’ income combined with a tax on financial profits may reduce inequality, preserve financial stability, and boost economic growth.

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Why is it important?

At the best of our knowledge, this is the first publication trying to model how the development of shadow banking (i.e., securitization and the production of complex structured financial products) is intrinsically interconnected and spurred by rising income and wealth inequality in developed countries.

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This page is a summary of: Inequality and finance in a rent economy, Journal of Economic Behavior & Organization, April 2019, Elsevier, DOI: 10.1016/j.jebo.2019.02.013.
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