Some Macroeconomic Effects of Income Inequality in a Simulation Approach

Abstract

The paper focuses on inequality as an independently analysed phenomenon that has a real economic impact. The emergence and the increase of income inequalities are inevitable and sometimes useful elements inherent to the functioning of market economies. This paper analyses the macroeconomic effects of inequalities in a macroeconomic model applying heterogeneous agents and running a Monte-Carlo simulation. The simulations prepared by the model have revealed the macroeconomic impacts of inequality and rationality in terms of financial culture, within an overall context of economic growth and stability. The conclusions are as follows: (1) Growing inequality dampens the rate of GDP growth. (2) Losses in consumption and economic value added emanating from income inequalities are lower if the rate of GDP growth is permanently higher. (3) With diminishing income inequalities, volatility of consumption decreases, thereby the volatility and cyclicality of economic growth slackens as well. (4) The rationalisation of expectations (more precise expectations of households) as well as progress in the development of financial culture can contribute to sustainable growth patterns and moderate volatility of GDP growth. This report amends research results released in the relevant international literature in as much as it enriches the analysis of the macroeconomic effects of income inequality with a new approach and new aspects. This report discusses the mutual relationship between inequality, economic growth, and volatility (cycles).