Inequality, redistributive policies and multiplierdynamics in an agent-based model with credit rationing
Abstract
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.
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