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Inequality and Financial Markets – A Simulation Approach in a Heterogeneous Agent Model

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  • Fischer, Thomas

Abstract

This paper presents a dynamic model with N heterogeneous consumers in the presence of financial markets allowing for saving and lending. Instead of adjusting their consumption based on utility maximization, agents use heuristics as suggested by behavioral theory. The main result of the model is that increased income inequality transforms into increased net worth inequality leading to increased price volatility on the market for durables. Unequal societies moreover are characterized by a current account surplus resulting from strong savings. Price volatility also increases if we increase heritage defined as the ratio of stock level of initial endowment to annual income. Medium size heritage on the other side increases the number of middle class households leading to a balanced current account. Extreme low or extreme high values for heritage contribute to a net debt situation with foreigners
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Suggested Citation

  • Fischer, Thomas, 2013. "Inequality and Financial Markets – A Simulation Approach in a Heterogeneous Agent Model," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 77241, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    • Handle: RePEc:dar:wpaper:77241
    Note: for complete metadata visit http://tubiblio.ulb.tu-darmstadt.de/77241/
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    1. Carl Chiarella & Roberto Dieci & Xue-Zhong He, 2008. "Heterogeneity, Market Mechanisms, and Asset Price Dynamics," Research Paper Series 231, Quantitative Finance Research Centre, University of Technology, Sydney.
    2. D'Orlando, Fabio & Sanfilippo, Eleonora, 2010. "Behavioral foundations for the Keynesian consumption function," Journal of Economic Psychology, Elsevier, vol. 31(6), pages 1035-1046, December.
    3. Michael Kumhof & Romain Rancière & Pablo Winant, 2015. "Inequality, Leverage, and Crises," American Economic Review, American Economic Association, vol. 105(3), pages 1217-1245, March.
    4. Cowell, F.A., 2000. "Measurement of inequality," Handbook of Income Distribution, in: A.B. Atkinson & F. Bourguignon (ed.), Handbook of Income Distribution, edition 1, volume 1, chapter 2, pages 87-166, Elsevier.
    5. Dirk Krueger & Fabrizio Perri, 2006. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory -super-1," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(1), pages 163-193.
    6. Maurice Obstfeld & Kenneth S. Rogoff, 2009. "Global imbalances and the financial crisis: products of common causes," Proceedings, Federal Reserve Bank of San Francisco, issue Oct, pages 131-172.
    7. Davies, James B. & Shorrocks, Anthony F., 2000. "The distribution of wealth," Handbook of Income Distribution, in: A.B. Atkinson & F. Bourguignon (ed.), Handbook of Income Distribution, edition 1, volume 1, chapter 11, pages 605-675, Elsevier.
    8. Thaler, Richard, 1980. "Toward a positive theory of consumer choice," Journal of Economic Behavior & Organization, Elsevier, vol. 1(1), pages 39-60, March.
    9. A.B. Atkinson & F. Bourguignon (ed.), 2000. "Handbook of Income Distribution," Handbook of Income Distribution, Elsevier, edition 1, volume 1, number 1.
    10. Raghuram G. Rajan, 2010. "Fault Lines: How Hidden Fractures Still Threaten the World Economy," Economics Books, Princeton University Press, edition 1, number 9111.
    11. Mr. Romain Ranciere & Mr. Nathaniel A. Throckmorton & Mr. Michael Kumhof & Ms. Claire Lebarz & Mr. Alexander W. Richter, 2012. "Income Inequality and Current Account Imbalances," IMF Working Papers 2012/008, International Monetary Fund.
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    1. repec:spo:wpmain:info:hdl:2441/6h4m03fi1i9olbq081sgh502mt is not listed on IDEAS
    2. Alberto Cardaci & Francesco Saraceno, 2019. "Inequality and imbalances: a monetary union agent-based model," Journal of Evolutionary Economics, Springer, vol. 29(3), pages 853-890, July.
    3. Alberto Cardaci & Francesco Saraceno, 2017. "Inequality and Imbalances: a Monetary Union Agent-Based Model," Working Papers hal-03455341, HAL.
    4. Thomas Fischer, 2017. "Can Redistribution by Means of a Progressive Labor Income-Taxation Transfer System Increase Financial Stability?," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 20(2), pages 1-3.
    5. Alberto Cardaci & Francesco Saraceno, 2019. "Between Scylla And Charybdis: Income Distribution, Consumer Credit, And Business Cycles," Economic Inquiry, Western Economic Association International, vol. 57(2), pages 953-971, April.
    6. Nadja König, 2016. "Household Debt and Macrodynamics - How do Income Distribution and Insolvency Regulations interact?," Macroeconomics and Finance Series 201603, University of Hamburg, Department of Socioeconomics.
    7. Alberto Cardaci & Francesco Saraceno, 2017. "Inequality and Imbalances: a Monetary Union Agent-Based Model," SciencePo Working papers Main hal-03455341, HAL.
    8. repec:hal:spmain:info:hdl:2441/6h4m03fi1i9olbq081sgh502mt is not listed on IDEAS

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