Inequality, Redistributive Policies and Multiplier Dynamics in an Agent-Based Model with Credit Rationing
25 Pages Posted: 1 Feb 2017
Date Written: January 31, 2017
We build an agent-based model populated by households with heterogenous and time-varying ﬁnancial conditions in order to study how diﬀerent inequality shocks aﬀect income dynamics and the eﬀects of diﬀerent types of ﬁscal policy responses. We show that inequality shocks generate persistent falls in aggregate income by increasing the fraction of credit-constrained households and by lowering aggregate consumption. Furthermore, we experiment with diﬀerent types of ﬁscal policies to counter the eﬀects of inequality-generated recessions, namely deﬁcit-spending direct government consumption and redistributive subsidies ﬁnanced by diﬀerent types of taxes. We ﬁnd that subsidies are in general associated with higher ﬁscal multipliers than direct government expenditure, as they appear to be better suited to sustain consumption of lower income households after the shock. In addition, we show that the eﬀectiveness of redistributive subsidies increases if they are ﬁnanced by taxing ﬁnancial incomes or savings.
Keywords: income inequality, fiscal multipliers, redistributive policies, credit-rationing, agent-based models
JEL Classification: E63, E21, C63
Suggested Citation: Suggested Citation