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Inequality Causes Recessions: A Fallout from Ramsey's Conjecture

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  • Belanger, Gilles
Abstract
Ramsey's conjecture implies that a market economy tends toward a politically impossible form of extreme inequality (with "the thrifty enjoying bliss and the improvident at the subsistence level"). Because political actions are not systematic, but arbitrary or random, the combination of market and political forces leads to instability, sometimes full-fledged crisis. I show how the mechanisms of debt relief, redistribution and the uncertainty related to them could boil down to a discount rate shock for an aggregate representative agent. Furthermore, to make this shock possible into a simple Real Business Cycle (RBC) model, I propose a two-capital setup, which provides an improved solution to the interest-rate-inelasticity issue than the usual investment adjustment costs. Finally, I show the model's generality by adding wage rigidity and inflation. Considering the simplicity of the general equilibrium model, results provide rich narratives for recessions.

Suggested Citation

  • Belanger, Gilles, 2016. "Inequality Causes Recessions: A Fallout from Ramsey's Conjecture," MPRA Paper 72335, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:72335
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    References listed on IDEAS

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    More about this item

    Keywords

    Inequality; Credit crises; business cycles; discount factor heterogeneity.;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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