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To Create or to Redistribute? That is the Question

Author

Listed:
  • Demetris Koursaros

    (Cyprus University of Technology)

  • Nektarios Michail

    (Central Bank of Cyprus)

  • Niki Papadopoulou

    (Central Bank of Cyprus)

  • Christos Savva

    (Cyprus University of Technology)

Abstract
This study attempts to explain low corporate investment 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 (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 banks 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. 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.

Suggested Citation

  • Demetris Koursaros & Nektarios Michail & Niki Papadopoulou & Christos Savva, 2018. "To Create or to Redistribute? That is the Question," Working Papers 2018-4, Central Bank of Cyprus.
    • Handle: RePEc:cyb:wpaper:2018-4
    as

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    File URL: https://www.centralbank.cy/images/media/pdf/Working-Paper-2018-04.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    investment; business cycles; asset redistribution; inequality;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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