2018/03 | LEM Working Paper Series | |
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The “Rajan Hypothesisâ€: a counter-factual experiment |
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Matteo Coronese and Isabelle Salle |
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Keywords | ||
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Income inequality; Distributional shocks; Under-consumption
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JEL Classifications | ||
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E70; C63; E03; E52
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Abstract | ||
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We integrate a centralized wage bargaining process into an otherwise
standard DSGE model with a financial accelerator to simulate
distributional shocks in the presence of financial instability. Our
framework provides a counterfactual analysis of the effects of the
observed decrease in the labor share when no concomitant rise in
households’ credit offsets the adverse effect on consumption. The
result is a prolonged under-consumption recession that outweighs the
initial boost in investment.
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Downloads | ||
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