Technological Innovation, Inequality, and Financial Instability

Abstract

Future crisis will be different from previous crises due to the fast speed of technological innovation. In particular, after the subprime crisis and the Piketty Panic, we need a new macroeconomic framework based on three ingredients, namely, fast and dramatic technological innovation, financial instability, and inequality. In this paper, we suggest an agent-based macroeconomic model based on these three components. Our model consists of firms with two sectors, such as downstream (D) and upstream (U) firms and banks. We consider the technological innovation as saving labor in D firms in addition to establishing credit relationships between firms and banks. We find several results that have rich economic implications: (i) Business-cycle fluctuation and inequality are generated by an interconnection between agents; (ii) Technological innovation can amplify business-cycle fluctuation and economic instability; (iii) A high concentration of advanced technology amplifies economic instability and inequality; and (iv) Monetary interest rate policies from the central bank can reduce inequality in sectors where there are technology gaps between firms, but these policies weaken economic stability.