Inequality and Imbalances : a Monetary Union Agent-Based Model
Abstract
Our paper investigates the impact of rising inequality in a two-country macroeconomic model with an
agent-based household sector characterised by peer effects in consumption. In particular, the model
highlights the role of inequality in determining diverging balance of payments dynamics within a currency
union. Inequality may drive the two countries into different growth patterns: where peer effects in
consumption interact with higher credit availability, rising income inequality leads to the emergence of a
debt-led growth. Where social norms determine weaker emulation and credit availability is lower, an
export-led regime arises. Eventually, a crisis emerges endogenously due to the sudden-stop of capital
ows from the net lending country, triggered by the excessive risk associated to the dramatic amount of
private debt accumulated by households in the borrowing country. Monte Carlo simulations for a wide
range of calibrations confirm the robustness of our results.
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