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Minimum consumption and transitional dynamics in wealth distribution

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  • Alvarez-Pelaez, Maria J.
  • Diaz, Antonia

Abstract

This paper investigates the evolution of wealth in a one sector growth model since the early stages of development to its steady state. A key feature of the model is that a household's consumption cannot fall below a positive level each period. This requirement introduces a positive association between the intertemporal elasticity of substitution and household wealth. Households only differ in their initial holdings of capital. The model is calibrated to match some key statistics of the US economy. The level of inequality in the walth distribution of our artificial economy increases in the early stages of development and declines as the economy approaches the steady state. The level of wealth inequality and its evolution resembles that of the US economy. Additionally our model illustrates that observing a time series Kuznets curve does not imply we should observe such relationship in cross-section data, and vice-versa.
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  • Alvarez-Pelaez, Maria J. & Diaz, Antonia, 2005. "Minimum consumption and transitional dynamics in wealth distribution," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 633-667, April.
    • Handle: RePEc:eee:moneco:v:52:y:2005:i:3:p:633-667
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