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Inequality, Myopia, and the Business Cycle

Author

Listed:
  • Lorenzo Carbonari

    (DEF and CEIS, Università di Roma “Tor Vergata”, Italy)

  • Filippo Maurici

    (Department of Political Sciences, Università Roma Tre, Italy)

Abstract

This work examines two economies that are identical except for their interpretation of a transitory shock in inequality, eventually affecting the aggregate Total Factor Productivity (TFP). The population consists of homogeneous workers and credit-constrained heterogeneous entrepreneurs. Along the transition path, compared with the case of perfect foresight, myopia: (i) sharply increases workers’ consumption and (ii) reduces aggregate wealth. No expectation rule, whether myopic or perfect foresight, is unambiguously dominant in terms of output, consumption, or welfare more broadly. We prove that, under myopic expectations, transitory shocks in inequality can lead to dynamic (local) instability.

Suggested Citation

  • Lorenzo Carbonari & Filippo Maurici, 2024. "Inequality, Myopia, and the Business Cycle," Working Paper series 24-19, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:24-19
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    More about this item

    Keywords

    myopia; inequality; stability; heterogeneous agents; transition dynamics;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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