Adjustment and income distribution. A micro-macro model for counterfactual analysis

François Bourguignon, William H. Branson, Jaime de Melo

Research output: Contribution to journalArticlepeer-review

Abstract

This paper presents a structural macro simulation model to quantify the effects of alternative stabilization packages on the distribution of income and wealth. The model combines the explicit microeconomic optimizing behavior characteristic of computable general equilibrium models with asset portfolio behavior of macroeconomic models in Tobin's tradition. In this model there are four main mechanisms by which policy changes affect the distribution of income and wealth. First, changes in factor rewards affect directly household income distribution. Second, household real incomes are affected by changes in their respective cost of living indexes. Third, household real incomes are affected by changes in real returns on financial assets since household incomes include income from financial holdings. Fourth, household wealth distribution is affected by capital gains and losses. Illustrative simulations with the model are carried out for a representative economy subject to the interest rate and terms-of-trade shocks of the early 1980s. The simulations suggest a large adverse impact on the distribution of income of a sharp contractionary package.

Original languageEnglish (US)
Pages (from-to)17-39
Number of pages23
JournalJournal of Development Economics
Volume38
Issue number1
DOIs
StatePublished - Jan 1992

ASJC Scopus subject areas

  • Development
  • Economics and Econometrics

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