Inequality and financial instability: an out-of-equilibrium analysis

Abstract This paper presents a theoretical model that examines the relationship between financial instability and economic inequality in an environment characterized by speculative beliefs among investors. We consider a medium-scale dynamic monetary economy in the tradition of Ferri’s works (Macroeconomics of growth cycles and financial instability, Edward Elgar Publishing, Cheltenham and Northampton, 2011) and Ferri (Aggregate demand, inequality and instability. Edward Elgar Publishing, Cheltenham and Northampton, 2016) by adding heterogeneous investor beliefs to investigate the potential impact of market speculation. Numerical simulations show that the boom phase in financial markets, driven by trend-driven sentiment, leads to a divergence from equilibrium and increases the income share of financial asset owners. The paper contributes to the literature by highlighting the intrinsic relationship between the rising capital share and the increase in financial speculative activity from a medium-run perspective.