In current years, statistical data show that the growth rate of returns on Taiwanese stock market1 and real estates2 are several times larger than the growth rate of labor income.3 However, only about 18%4 or more of Taiwanese can accumulate wealth quickly by investment. Thus, the disposable income gap between investors and workers keeps expanding. At this time, someone considers that central bank must be responsible for improvement in income inequality when stabilizing the GDP growth rate. As a result, we wonder whether monetary policy can slow down the deterioration of income inequality.
Kumhof, Rancière and Winant (2015), and Kumhof and Rancière (2010) find that a sharp increase in income inequality and debt-to-income ratios among lower- and middle-income households caused subprime mortgage crisis, and then led to financial crisis in 2008 causing global recession. Taking Taiwan for example, the GDP growth rate in 2008 declined to 0.73%; moreover, it declined to -1.81% in 2009. In addition, firms started to let employers take unpaid leave or even lay off them. As a result, the lower income share of the low- or middle-income groups not only increased the debt-to-income ratios, but worsened the solvency of the low- and middle-income groups to become a potential factor of another financial crisis. Therefore, more and more researches focus on income inequality.
1 The raw data are available in Taiwan Economic Journal Database. We take the average of data from 2003 to 2016.
2 The raw data are available in Sinyi Realty Incorporation. We take the average of data from 2001 to 2016.
3 The raw data are available in the Directorate-General of Budget, Accounting and Statistics, Executive Yuan of Taiwan. We take the average of data from 2012 to 2016.
4 The raw data are available in the Directorate-General of Budget, Accounting and Statistics, Executive Yuan of Taiwan. We take the average of data from 2011 to 2015.
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The empirical works on income inequality of Taiwan have traditionally focused on the Gini coefficient or the Oshima index.5 These two indexes both show that the income distribution of Taiwan becomes more and more uneven. Especially, in 2001 and 2009, the Oshima index rises sharply during the Dot-com bubble and the financial crisis. Therefore, we can find that the economic crises will deteriorate the income distribution of Taiwan.
Moreover, Chu and Kang (2015) calculates the ratio of Taiwanese income of top 5% over bottom 5%. The increasing trend of income inequality is more obvious than Oshima index and Gini coefficient.
Source: The Survey of Family Income and Expenditure in Taiwan Area6 (June 2017)
Figure 1: Taiwanese Oshima index and Gini coefficient from 1990-2014
5 The Oshima index is defined as the ratio of income of top 20% over that of bottom 20%. The Directorate-General of Budget, Accounting and Statistics, Executive Yuan of Taiwan and the Ministry of Finance updates annually.
6 The Directorate-General of Budget, Accounting and Statistics, Executive Yuan of Taiwan surveys the residence’s income annually. The outcome can be used to calculate Oshima index and Gini coefficient.
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Figure 2: The ratio of Taiwanese income of top 5% over bottom 5% from 1998-2011
Source: Chu, Chou and Hu (2015)
Figure 3: Taiwanese top 10% income shares from 2001-2013
Recent empirical works have also emphasized the income share of the rich. For example, Chu, Chou and Hu (2015) estimates that the top 10% richer almost hold 25% or 26% of Taiwan total income.
In most of traditional macroeconomic theoretical model, there is only one representative household, but it is hard to discuss income inequality under this assumption. Therefore, the heterogeneity of households plays a key role in our paper.
Referring to Kumhof, Rancière and Winant (2015), Kumhof, Lebarz, Rancière, Richter and Throckmorton (2012), and Lansing and Markiewicz (2016), we assume the top 10% of the income distribution can be considered as savers or entrepreneurs
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implying top earners can use parts of income to accumulate wealth in the form of deposits in banks. On the other hand, the bottom 90% earners of the income distribution can be considered as debtors or workers implying bottom earners can smooth the variation of their consumption credited from banks, but probably be along with a higher debt-to-income ratio. Different from Kumhof, Rancière and Winant (2015), Kumhof, Lebarz, Rancière, Richter and Throckmorton (2012), and Lansing and Markiewicz (2016), we assume both groups of households supply labor endogenously to firms, add the existence of banks that can transfer top earners’ wealth to bottom earners with two kinds of interest rates, and add the price setting to test the effects of policy.
As a result, we present a dynamic stochastic general equilibrium model with two kinds of households to explain whether or not positive technology shock and contractionary monetary policy will lead to a worse income inequality.
This paper is divided into eight chapters. Chapter one is the introduction. Chapter two lists the related literatures. Chapter three outlines the DSGE model, the first-order conditions, taxation policy and central bank’s monetary policy. Chapter four discusses model calibration. Chapter five shows the simulation of the model by Dynare. Chapter six concludes the outcomes. Chapter seven is the reference. Chapter eight shows the table of parameters and the figures of dynamic analyses.