New research on inequality

How does inequality emerges in an economy?

In this paper, Patil and Bouchaud demonstrate that wealth inequalities can emerge from simple economic interactions and production dynamics. The authors use an agent-based model where each entity simultaneously produces and consumes indivisible goods. Agents start with equal wealth and set initial prices randomly. Subsequently,  prices adjust based on supply-demand imbalances. More specifically their model exhibits the following dynamics:

• The model reveals a non-trivial phase transition beyond which a market-clearing equilibrium exists but becomes dynamically unreachable.
• When production capacity exceeds a threshold and adapts too slowly, some agents cannot sell all their goods, leading to global price deflation and significant wealth inequalities, resulting in a rich class and a poor class.
• As a result, at this critical productivity value the system transitions to a state where wealth concentrates in the hands of a few, leading to permanent underconsumption and price deflation.

Emergent Inequalities in a Primitive Agent-Based Good-Exchange Model
Authors: Nirbhay Patil, Jean-Philippe Bouchaud
From: Ecole Normale Supérieure, Paris, Ecole Polytechnique

Inequality and financial stability

In this note Tsojaervi and Jerow  take initial steps toward a broader understanding of the potential channels through which inequality may affect financial stability. The authors look at U.S. data from from 1964 to 2019 and use predictive regressions to analyze the impact of inequality on the four main categories of vulnerability monitored in the Financial Stability Report. These categories are: nonfinancial leverage, asset valuations, financial leverage, and funding risk. Their findings include:

• An increase in income inequality is associated with an increase in corporate bond debt relative to GDP. A 1 percent increase in the top 1 percent income share predicts a 0.166 percent increase in the ratio of corporate bond debt to GDP.
• A rise in income inequality is associated with an increase in the ratio of assets to GDP for mutual funds and life insurers.
• An increase in income inequality is positively correlated with the prevalence of nonbank short-term wholesale funding in the financial system.

[I]nequality increases savings of the rich, and these increased savings feed into the financial system through different asset classes and eventually end up increasing the supply of credit, increasing dissaving of the rest of the households

Inequality and financial sector vulnerabilities
By: Anni T. Isojaervi, Sam Jerow – Federal Reserve Board