Title: To create or redistribute: That is the question
Authors: Demetris Koursaros - Cyprus University of Technology (Cyprus) [presenting]
Christos Savva - Cyprus University of Technology (Cyprus)
Nektarios Michail - Cyprus University of Technology (Cyprus)
Niki Papadopoulou - Central Bank of Cyprus (Cyprus)
Abstract: The aim is to explain the post-crisis low corporate investment is attempted to be explained despite aggressive easing in the financial conditions. Agents can utilize funding by either investing in capital or by redistributing existing assets. The former increases total income and employment while the latter alters the distribution of wealth among agents. We document empirically and explain theoretically that wealth redistribution increases while capital investment decreases during recessions because it is less risky for banks and more profitable for investors to redistribute existing wealth rather than create new. This exacerbates recessions and slows recoveries as it starves entrepreneurs from funding affecting capital creation. In addition, the aim is to explain rising inequality in recessions and why inequality can be harmful. As asset redistribution is a privilege of the rich, an increase in inequality encourages more income redistribution making recessions more severe. Macroprudential policies promoting access to finance to the ``good-production'' sector and discouraging asset redistribution can potentially boost recoveries.