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Inequality and Imbalances : a Monetary Union Agent-Based Model



Type:   Working paper
Title:   Inequality and Imbalances : a Monetary Union Agent-Based Model
Author(s):   Cardacci, Alberto - Lombardy Advanced School of Economics Milan (Author)
Saraceno, Francesco (1967-...) - Observatoire français des conjonctures économiques (Author)
Date issued:   2017-12
Publisher:   Paris  :  OFCE
Series:   Working Paper de l'OFCE  :  30
Keywords:   [en] Inequality, Current Account, Currency Union, Agent -based model
JEL:   C63,  D31,  E21,  F32,  F43
Abstract:   [en] 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.


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