The researchers model the economy on a Pareto curve where most wealth is held at the top end, and they assume people will trade randomly with each other when their budget allows. As wealth concentrates, the model shows a reduction in liquidity because a few rich people canapos;t compensate for the transaction volume of many people.
As inequality in the wealth distribution increases, cash concentrates more and more on the wealthiest agents, thereby suppressing the probability of successful exchanges, the paper says. Therefore, the economy freezes because financial resources (ie cash) concentrates in the hands of few agents.
The paper offers more proof of what many economists have been saying for years: People on middle and lower incomes are vital for economic growth. It also adds to the case for so-called helicopter money, where instead of stimulating the economy through low interest rates and quantitative easing, central banks give money direct to consumers. Quantitative easing#x2014;the usual sort of policy to boost growth, which involves creating money to buy financial assets#x2014;has been great for the stock markets, some commentators argue. But it hasnapos;t revitalized the main economy as much as everyday consumers could.