The Macroeconomic Implications of Financialisation on Wealth and Income Distribution – A Stock-Flow Consistent Approach

Deregulation and globalization since the early 1990s caused a boom in the current global financial cycle, which cumulated in the financial crisis in 2007. Austerity fiscal policies after the financial crisis induced Central Banks all over the world to intervene with stimulating ‘unconventional’ monetary policies. In earlier papers we developed several stock flow consistent models for an open Euro Area economy to investigate various aspects of the impact of these developments, with special attention to the role of the Central Bank with low interest policy and quantitative easing. We analysed the influence on mortgage growth and house prices, the growing amount of funded pension savings held abroad and the destabilising impact of low interest rates on pension claims, and the phenomenon that firms more and more use their savings for share buy-backs and (speculative) investments abroad – see Muysken and Meijers (2022) for an overview. However, we did not pay explicit attention to the distributional consequences these developments might have.
The social and economic impact of the COVID crisis since early 2020 stimulated the awareness in the literature and the policy debate that the increase in house prices and asset prices invigorated wealth inequality. This inequality was strengthened in countries with funded pension systems, because low interest rates strongly increased pension claims, which implies higher mandatory pension contributions for employees with different implications for young and old workers. Finally, there is a more evasive impact related to the attitude that rules that held prior to the financial crises should no longer be followed too close – the lenience allowed to enable individual banks to survive and to enable central banks to influence the economy directly since the low interest rate policy is no longer effective and has a demoralising impact on society. These developments create social tensions and therefore can have severe economic consequences.
In the present paper we bring all our earlier models together in one stock-flow consistent model, which we estimate and calibrate for the Netherlands. The model is based on a stock-flow consistent set of macroeconomic data, which we collected for the Netherlands. From simulations with our model we show (a) why housing price bubbles occur (due to riskier bank behaviour); (b) why asset price bubbles occur (also due to speculation by firms); (c) the destabilising impact of low interest rates on pension claims; (d) how these developments have contributed to an increasing wealth inequality and income inequality. We also show how inequality reacts to various shocks, for instance in the interest rate, the wage rate, the risk appetite of banks and firms and the fall in world trade.
JEL Code: E44, B5, E6, F45, G21, G32
Key words: financialisation, wealth distribution, income distribution, stock-flow consistent modelling