To Create or to Redistribute? That is the Question

Abstract

This study attempts to explain low Gdp growth in the post-crisis period, which persisted despite aggressive easing of financial conditions. Agents utilize available funding by either investing in new capital creation or by acquiring existing assets for the capital gain (asset redistribution). The former increases total income and employment, while the latter alters the distribution of wealth amongst agents. Theoretical explanations and empirical evidence are provided to support the argument that during recessions investors deem it more profitable and lenders find it safer to fund re-purchases of existing assets, rather than create new assets. This trend exacerbates a recession and slows recovery as it deprives entrepreneurs of funding and thus alters the capital structure of the economy. Furthermore, this scenario provides an explanation of the phenomenon of rising inequality and social harm over the course of a recession. As asset redistribution is predominantly a privilege of the rich, an increase in inequality encourages more income redistribution, thus further exacerbating recessions. Finally, it is demonstrated that macroprudential policies promoting access to finance for new capital investments can discourage asset redistribution and potentially boost recovery during downturns.