Dualism and macroeconomic volatility

This paper develops a simple macroeconomic model that shows that combining capital market imperfections together with unequal access to investment opp ortunities across individuals can generate endogenous and permanent fluctua tions in aggregate GDP, investment, and interest rates. Reducing inequality of access may be a necessary condition for macroeconomic stabilization. Mo reover, countercyclical fiscal policies have a role to play: in our model s avings are underutilized in slumps because of the limited debt capacity of potential investors. Therefore, the government should issue public debt dur ing recessions in order to absorb those idle savings and finance investment subsidies or tax cuts for investors.