The 2008 financial turmoil and the process of de-leveraging by the private sector observed in the following years have drawn attention to the crucial role of credit as a factor leading both to the instability of the system and to a strengthening of real-financial linkages in the economy. In the particular case of the household sector in the United States, an additional factor has come into play: higher indebtedness has been associated with higher income inequality. This project develops a macroeconomic framework that focuses on the relationships between private sector leverage, income distribution, and aggregate demand as a source of instability of the economic system. The theoretical models involve heterogeneous firms and households aggregated by means of an innovative analytical methodology.
Macroeconomic Instability and Microeconomic Financial Fragility: A Stock-Flow Consistent Approach with Heterogeneous Agents