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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Income Inequality and Macroeconomic Fluctuations
Murat F. Iyigun and Ann L. Owen

Abstract:  When per capita income is low, increases in income inequality make macroeconomic cycles less severe. We present a model in which access to credit is based on earnings potential. If low as well as middle income individuals are credit constrained, increases in income inequality lead to smaller fluctuations in aggregate consumption and output. Empirical evidence from cross-country data supports the view that greater income inequality causes lower variation of real consumption and output growth in low income countries. When per capita income is high, however, this effect is reversed.

Full paper (370 KB PDF)

Business cycles, credit constraints

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Last update: July 19, 2001