The Impact of Financialization and Income Inequality on Economic Growth, Investment Processes and Innovation

Abstract

For the macroeconomic policy to be effective, macroeconomic models must take into account the interrelations between the financial and real sectors of the national economy. The subject of the research is the impact of financialization (expansion of the financial sector influence) and heterogeneity of investment decisions made by households and organizations on the inequality of income and wealth distribution as well as on household consumption and investment demand generated by organizations. The purpose of the research was to simulate the integrated influence and inter- influence of financialization of the economy leading to the following phenomena: an increase in the financial capabilities of economic agents, households and organizations and an increase in their debt; heterogeneity of decisions made by households (with account for different education levels) towards investment in their professional skill improvement, in particular through bank loans; heterogeneity of decisions made by organizations towards investment in expanding the existing production or mastering innovative product manufacturing; inequality in distribution of household incomes, components of aggregate demand in the economy, unemployment, etc. The research was carried out using an agent-oriented AB-SFC model with consistent flows and reserves that takes into account the specifics of investment behavior of economic agents (households and companies). The paper concludes that the financialization can contribute to the economic growth and the leverage and, accordingly, to the debt of economic agents and a higher volatility of macroeconomic aggregates such as aggregate demand components. The research finding also show that innovation and technological changes resulting from investment preferences of organizations and households can also, along with the financialization, aggravate the income inequality of households.