Essays on Economic Inequality and Financial Instability

The present dissertation aims to contribute to the macroeconomic analysis of economic inequality and financial instability in the light of the two important contributions in the field of economics, respectively Capital in the Twenty-First Century by Thomas Piketty and the Financial Instability Hypothesis by Hyman Minsky. The dissertation is composed of three main chapters. Chapter 1 - Thomas Piketty’s Capital in the Twenty-First Century is primarily an empirical investigation into the history of the distribution of income and wealth in developed countries. Piketty, however, goes beyond this approach, presenting a theory of the long-run tendency of wealth inequality and rooting his work deeply in economic theory. In this paper we review and develop the theoretical model of Piketty’s book. We can divide the model into two parts: firstly, the "fundamental laws of capitalism" and the change in the functional distribution of income are analysed. Secondly, the evolution of personal wealth distribution is examined. Alongside the development of the model, the paper points out two shortcomings. We show the contradiction of the original model in explaining the increase of the capital/income ratio with the change in the functional distribution of income. Moreover, we highlight the inconsistency between the definition of capital and the model proposed. The paper concludes by outlining alternative approaches to the problem, calling for a major rethinking about the causes of rising wealth inequality. Chapter 2 - In the present paper we propose a theoretical approach to the study of wealth inequality different from that of Thomas Piketty (2014a, 2014b). Considering the various forms of capital and observing the high degree of financialisation in modern economies, we reassess the problem dealing not only with the real component but also with the financial one. For this purpose, we extend the macroeconomic model as proposed by Ferri (2016), by introducing private debt to generate a proper Minsky economy. The results obtained are different from those obtained by Piketty; we revisit and compare the main findings. At the same time, we link the inequality macro-analysis with the Minskyan Financial Instability Hypothesis (FIH). In the presence of a fall in the retention rate, numerical simulations from the nonlinear model generate endogenous Minsky’s cycles characterised by an increasing capital share during the boom phases. In doing this, the present paper contributes to the literature by setting the conditions in which the increasing capital share and the FIH can occur simultaneously. Chapter 3 - In this paper we empirically analyse Minskyan financial cycles in asset prices, where the cycles are driven by the presence of two unobserved evaluation price strategies: the fundamentalist and the extrapolative price strategy. To achieve this, we construct a model that incorporates the two behavioural equations and we investigate the financial cycles in a state space model. Using the Kalman filter, the conditions for the existence of cycles can be evaluated empirically. The model is estimated for four OECD countries using the times series of equity and housing prices over the period 1970-2017 for annual data. We find evidence of cycles in the equity market for the UK, France, Germany and the US. Regarding housing prices, we find evidence of cyclical fluctuations in the UK, France and the US but not in Germany. For both the equity market and the housing market, we find the highest price overshooting in the UK and the US. Our results provide empirical support for the Minskyan theory, highlighting the role of the evaluation effect for an endogenous generation of cyclical phenomena in asset prices.