Hostname: page-component-54dcc4c588-mz6gc Total loading time: 0 Render date: 2025-09-18T05:54:19.825Z Has data issue: false hasContentIssue false
  • English
  • Français

Financial complexity, cycles and income inequality

Published online by Cambridge University Press:  15 September 2025

Spiros Bougheas ,
Pasquale Commendatore ,
Laura Gardini ,
Ingrid Kubin  and
Thomas O. Zörner
Spiros Bougheas
Affiliation:
University of Nottingham, Nottingham, UK
Pasquale Commendatore
Affiliation:
University of Naples ’Federico II’, Naples, Italy
Laura Gardini
Affiliation:
University of Urbino ’Carlo Bo’, Urbino, Italy VSB-Technical University of Ostrava, Ostrava, Czechia
Ingrid Kubin
Affiliation:
Vienna University of Economics and Business, Vienna, Austria
Thomas O. Zörner*
Affiliation:
Oesterreichische Nationalbank (OeNB), Vienna, Austria
*
Corresponding author: Thomas O. Zörner; Email: thomas.zoerner@oenb.at
Get access Rights & Permissions [Opens in a new window]

Abstract

We introduce a banking sector and heterogeneous agents in the dynamic overlapping generations model of Matsuyama et al. (2016). Our model captures the benefits and costs of an advanced banking system. While it allocates resources to productive activities, it can also hinder progress if it invests in projects that do not contribute to capital formation, and potentially triggering instabilities due to the emergence of cycles. Our intergenerational dynamic framework enables us to show that income inequality between agents increases during recessions, confirming empirical observations. Moreover, we identify both changes in production factor prices and the reallocation of agents across occupations as driving factors behind the increased inequality.

Keywords

BanksFinancial InnovationCyclesIncome InequalityE32E44G21

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 29 , 2025 , e141
Copyright
© The Author(s), 2025. Published by Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

Footnotes

*

Disclaimer: The views expressed in this paper do not necessarily reflect those of the Oesterreichische Nationalbank or the Eurosystem. This paper supersedes an earlier draft circulated under the title “Financial Development, Cycles and Income Inequality in a Model with Good and Bad Projects” (CESifo Working Paper No. 10135, Dec. 2022).

References

Acharya, V.V. and Richardson, M. (2009) Restoring Financial Stability: How to Repair a Failed System. In: Acharya, V.V. and Richardson, M.. (eds.), Hoboken, NJ: John Wiley & Sons, Inc.10.1002/9781118258163CrossRefGoogle Scholar
Acharya, V.V. and Schnabl, P. (2009) Do Global Banks Spread Global Imbalances? The Case of Asset-Backed Commercial Paper during the Financial Crisis of 2007-09. In: 10th Jacques Polak Annual Research Conference Hosted by the IMF. Washington, DC.10.3386/w16079CrossRefGoogle Scholar
Avrutin, V., Gardini, L., Sushko, I. and Tramontana, F. (2019) Continuous and Discontinuous Piecewise Smooth One-Dimensional Maps: Invariant Sets and Bifurcation Structures. Singapore: World Scientific.10.1142/8285CrossRefGoogle Scholar
Azariadis, C. and Smith, B.D. (1998) Financial intermediation and regime switching in business cycles. American Economic Review 88, 516–536.Google Scholar
Bayer, C., Born, B. and Luetticke, R. (2024) Shocks, frictions, and inequality in US business cycles. American Economic Review 114(5), 1211–1247.10.1257/aer.20201875CrossRefGoogle Scholar
Beaudry, P., Galizia, D. and Portier, F. (2020) Putting the cycle back into business cycle analysis. American Economic Review 110, 1–47.CrossRefGoogle Scholar
Beck, T., Chen, T., Lin, C. and Song, F.M. (2016) Financial innovation: the bright and the dark side. Journal of Banking and Finance 72, 28–51.10.1016/j.jbankfin.2016.06.012CrossRefGoogle Scholar
Benhabib, J., Wang, P. and Dong, F. (2018) Adverse selection and self-fulfilling business cycles. Journal of Monetary Economics 94, 114–130.10.1016/j.jmoneco.2017.12.003CrossRefGoogle Scholar
Benmelech, E. and Dlugosz, J. (2009) The credit ratings crisis. In: Benmelech, E. and Dlugosz, J.. (eds.), NBER Macro Annual. Cambridge, MA: National Bureau of Economic Research.Google Scholar
Bernanke, B., Gertler, M. and Gilchrist, S. (1999) The financial accelerator in a quantitative business cycle framework. In: Bernanke, B., Gertler, M. and Gilchrist, S.. (eds.), Handbook of Macroeconomics, pp. 1341–1393.10.1016/S1574-0048(99)10034-XCrossRefGoogle Scholar
Bhandari, A., Evans, D., Golosov, M. and Sargent, T. J. (2021) Inequality, business cycles, and monetary-fiscal policy. Econometrica 89, 2559–2599.10.3982/ECTA16414CrossRefGoogle Scholar
Bilbiie, FO., Primiceri, GE. and Tambalotti, A. (2023) Inequality and Business Cycles. NBER Working Paper 31729. National Bureau of Economic Research. https://ideas.repec.org/p/nbr/nberwo/31729.html.10.3386/w31729CrossRefGoogle Scholar
Bitler, M. and Hoynes, H. (2015) Heterogeneity in the impact of economic cycles and the great recession: effects within and across the income distribution. American Economic Review: Papers & Proceedings 105, 154–160.CrossRefGoogle Scholar
Brunnermeier, MK., Eisenbach, T. and Sannikov, Y. (2013) Macroeconomics with financial frictions: a survey. In: Brunnermeier, MK., Eisenbach, T. and Sannikov, Y.. (eds.), Advances in Economics and Econometrics, Tenth World Congress of the Econometric Society, II: Applied Economics, pp. 4–94.Google Scholar
Castañeda, A., Díaz-Giménez, J. and Ríos-Rull, J.-V. (1998) Exploring the income distribution business cycle dynamics. Journal of Monetary Economics 42(1), 93–130.CrossRefGoogle Scholar
Chousakos, K., Gorton, G. and Ordoñez, G. (2023) Information dynamics and macro fluctuations. American Economic Journal: Macroeconomics 15, 372–400.Google Scholar
Coval, J., Jurek, J. and Stafford, E. (2009) The economics of structured finance. Journal of Economic Perspectives 23, 3–26.10.1257/jep.23.1.3CrossRefGoogle Scholar
de la Torre, A., Feyen, E. and Ize, A. (2013) Financial development: structure and dynamics. World Bank Economic Review 27, 514–541.CrossRefGoogle Scholar
Dong, F. and Xu, Z. (2020) Cycles of credit expansion and misallocation: the good, the bad and the ugly. Journal of Economic Theory 186, 104994.10.1016/j.jet.2020.104994CrossRefGoogle Scholar
Eeckhout, J. and Lindenlaub, I. (2019) Unemployment cycles. American Economic Journal: Macroeco-nomics 11(4), 175–234.Google Scholar
Fagiolo, G., Napoletano, M. and Roventini, A. (2008) Are output growth-rate distributions fat-tailed? Some evidence from OECD countries. Journal of Applied Econometrics 23(5), 639–669.10.1002/jae.1003CrossRefGoogle Scholar
Feenstra, R.C., Inklaar, R. and Timmer, M.P. (2015) The next generation of the penn world table. American Economic Review 105(10), 3150–3182.10.1257/aer.20130954CrossRefGoogle Scholar
Fernández-Villaverde, J., Mandelman, F., Yu, Y. and Zanetti, F. (2021) The “Matthew effect” and market concentration: search complementarities and monopsony power. Journal of Monetary Economics 121(C), 62–90.10.1016/j.jmoneco.2021.04.005CrossRefGoogle Scholar
Fernández-Villaverde, J., Mandelman, F., Yu, Y. and Zanetti, F. (2024) Search complementarities, aggregate fluctuations, and fiscal policy. The Review of Economic Studies 92, 2502–2536.10.1093/restud/rdae053CrossRefGoogle Scholar
Gennaioli, N. and Shleifer, A. (2018) A Crisis of Beliefs. Princeton, NJ: Princeton University Press.Google Scholar
Gennaioli, N., Shleifer, A. and Vishny, R. (2012) Neglected risks, financial innovation, and financial fragility. Journal of Financial Economics 104, 452–468.CrossRefGoogle Scholar
Gennaioli, N., Shleifer, A. and Vishny, R. (2013) A model of shadow banking. Journal of Finance 68, 1331–1363.10.1111/jofi.12031CrossRefGoogle Scholar
Giraud, G. and Grasselli, M. (2021) Household debt: the missing link between inequality and secular stagnation. Journal of Economic Behavior & Organization 183, 901–927.10.1016/j.jebo.2019.03.002CrossRefGoogle Scholar
Goodwin, R.M. (1967) A growth cycle. In: Goodwin, R.M. (ed.), Socialism, Capitalism and Economic Growth. Cambridge: Cambridge University Press, pp. 54–58.Google Scholar
Gorton, G. and Metrick, A. (2012) Securitized banking and the run on repo. Journal of Financial Economics 104, 425–451.CrossRefGoogle Scholar
Gorton, G. and Ordoñez, G. (2020) Good booms, bad booms. Journal of the European Economic Association 18, 618–665.10.1093/jeea/jvy058CrossRefGoogle Scholar
Gorton, G. and Souleles, N.S. (2006) Special purpose vehicles and securitization. In: Gorton, G. and Souleles, N.S.. (ed.), The Risk of Financial Institutions. Chicago, IL, USA: University of Chicago Press, pp. 549–590.Google Scholar
Griffin, J.M. (2021) The years of evidence: was fraud a force in the financial crisis? Journal of Economic Literature 59, 1293–1321.10.1257/jel.20201602CrossRefGoogle Scholar
Gu, C., Mattesini, F., Monnet, C. and Wright, R. (2013) Endogenous credit cycles. Journal of Political Economy 121, 940–965.10.1086/673472CrossRefGoogle Scholar
Hamilton, B.H. (2000) Does entrepreneurship pay? An empirical analysis of the returns to self-employment. Journal of Political Economy 108, 604–631.10.1086/262131CrossRefGoogle Scholar
Heathcote, J., Perri, F. and Violante, G.L. (2020) The rise of US earnings inequality: does the cycle drive the trend? Review of Economic Dynamics 37, S181–S204.10.1016/j.red.2020.06.002CrossRefGoogle ScholarPubMed
Holmström, B. and Tirole, J. (1997) Financial intermediation, loanable funds, and the real sector. Quarterly Journal of Economics 112, 663–691.CrossRefGoogle Scholar
Ivashina, V. and Scharfstein, D.S. (2010) Bank lending during the financial crisis of 2008. Journal of Financial Economics 97, 319–338.10.1016/j.jfineco.2009.12.001CrossRefGoogle Scholar
Keys, B.J., Mukherjee, T., Seru, A. and Vig, V. (2010) Did securitization lead to lax screening? Evidence from subprime loans. Quarterly Journal of Economics 125, 1–45.10.1162/qjec.2010.125.1.307CrossRefGoogle Scholar
Kiyotaki, N. and Moore, J. (1997) Credit cycles. Journal of Political Economy 105, 211–248.10.1086/262072CrossRefGoogle Scholar
Kubin, I. and Zörner, T. (2021) Credit cycles, human capital and the distribution of income. Journal of Economic Behavior & Organization 183, 954–975.CrossRefGoogle Scholar
Matsuyama, K. (2013) The good, the bad, and the ugly: an inquiry into the causes and nature of credit cycles. Theoretical Economics 8, 623–651.Google Scholar
Matsuyama, K., Sushko, I. and Gardini, L. (2016) Revisiting the model of credit cycles with good and bad projects. Journal of Economic Theory 163, 525–556.10.1016/j.jet.2016.02.010CrossRefGoogle Scholar
Mian, A. and Sufi, A. (2009) The consequences of Mortgage credit expansion: evidence from the 2007 Mortgage default crisis. Quarterly Journal of Economics 124, 1449–1496.10.1162/qjec.2009.124.4.1449CrossRefGoogle Scholar
Mizen, P. (2008) The credit crunch of 2007-2008: a discussion of the background, market reactions, and policy responses. Federal Reserve Bank of St. Louis Review 90, 531–567.Google Scholar
Myerson, R.B. (2012) A model of moral-hazard credit cycles. Journal of Political Economy 120, 847–878.CrossRefGoogle Scholar
Piketty, T. (2014) Capital in the Twenty-First Century. Cambridge, MA: Harvard University Press.10.4159/9780674369542CrossRefGoogle ScholarPubMed
Pozsar, Z., Adrian, T., Ashcraft, A. and Boesky, H. (2010) Shadow Banking. Tech. Rep. Federal Reserve Bank of New York. https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr458.pdf.10.2139/ssrn.1645337CrossRefGoogle Scholar
Richardson, M. and White, L. (2009) The rating agencies: Is regulation the answer?. In: Richardson, M. and White, L.. (eds.), Restoring Financial Stability: How to Repair a Failed System.Google Scholar
Schaal, E. and Taschereau-Dumouchel, M. (2015) Coordinating Business Cycles. SSRN Working Paper. SSRN. https://ssrn.com/abstract=2567344.Google Scholar
Schmitt-Grohé, S. and Uribe, M. (2021) Deterministic debt cycles in open economies with flow collateral constraints. Journal of Economic Theory 192, 105195.10.1016/j.jet.2021.105195CrossRefGoogle Scholar
Shin, H.S. (2009) Reflections on Northern Rock: the bank run that heralded the global financial crisis. Journal of Economic Perspectives 23, 101–120.CrossRefGoogle Scholar
Sordi, S. and Vercelli, A. (2014) Unemployment, income distribution and debt-financed investment in a growth cycle model. Journal of Economic Dynamics & Control 48, 325–348.10.1016/j.jedc.2014.09.030CrossRefGoogle Scholar
Stanton, R. and Wallace, N. (2010) CMBS subordination, ratings inflation, and regulatory-capital arbitrage. Financial Management 47, 175–201.10.1111/fima.12183CrossRefGoogle Scholar
Stein, J.C. (2013) Overheating in credit markets: Origins, measurement, and policy responses. In: Speech delivered at: Restoring Household Financial Stability after the Great Recession; A Research Symposium at Federal Reserve Bank of St. Louis, Missouri (February 7, 2013).Google Scholar
Suarez, J. and Sussman, O. (1997) Endogenous cycles in a Stiglitz-Weiss economy. Journal of Economic Theory 76, 47–71.CrossRefGoogle Scholar
Sunaga, M. (2017) Endogenous growth cycles with financial intermediaries and entrepreneurial innovation. Journal of Macroeconomics 53, 191–206.10.1016/j.jmacro.2017.07.001CrossRefGoogle Scholar
Sushko, I., Avrutin, V. and Gardini, L. (2016) Bifurcation structure in the skew tent map and its application as a border collision normal form. Journal of Difference Equations and Applications 22, 1040–1087.10.1080/10236198.2015.1113273CrossRefGoogle Scholar
Wang, Y. and Xia, H. (2014) Do lenders still monitor when they can securitize loans? Review of Financial Studies 27, 2354–2391.10.1093/rfs/hhu006CrossRefGoogle Scholar