The macroeconomics of inequality and instability
Till van Treeck
University of Duisburg-Essen and Macroeconomic Policy Institute (IMK)
Financial support by the Institute for New Economic Thinking (INET) is gratefully acknowledged
The Spectre of Stagnation? Europe in the World Economy19th FMM Conference
Berlin, 22 October 2015
September 2015 0 / 47
Outline
I. Macroeconomic implications of income inequality
Income distribution and macroeconomic instability?
Income inequality and macroeconomic instability in the United States
Income inequality and macroeconomic instability in Germany
Income distribution in an open-economy SFC model
II. Income distribution and current account imbalances
Introduction and literature
Descriptive analysis/illustration of hypotheses
Estimation methodology
Estimation results
Conclusion
September 2015 1 / 47
Outline
I. Macroeconomic implications of income inequality
Income distribution and macroeconomic instability?
Income inequality and macroeconomic instability in the United States
Income inequality and macroeconomic instability in Germany
Income distribution in an open-economy SFC model
II. Income distribution and current account imbalances
Introduction and literature
Descriptive analysis/illustration of hypotheses
Estimation methodology
Estimation results
Conclusion
September 2015 2 / 47
Income distribution and macroeconomic instability?
INET project: Income inequality, household leverage and current accountimbalances
Contributes to growing literature on inequality as a cause of theglobal financial crisis starting in 2007/8
Looks at potential links between income distribution and currentaccount imbalances
Macro panel analysis for 20 countries (Behringer/van Treeck, 2015)Three-country SFC model calibrated for U.S., Germany, China(Belabed/Theobald/van Treeck, 2013)Two-country DSGE model calibrated for U.K., Germany (Gruning/Theobald/vanTreeck, 2015)
Attempts to combine two strands of the literature
Post-Keynesian literature on “wage-led growth” (functional income distribution)Relative income hypothesis, “trickle-down consumption” (personal incomedistribution)
September 2015 3 / 47
Income distribution and macroeconomic instability?
Functional income distribution and aggregate demand
In rational expectations models households fully ‘pierce the corporate veil’
But consumers may react differently to a rise in dividends than to an increase incorporate retained earnings (e.g. Feldstein and Fane, 1973; Poterba, 1991; Baker et al.,2007; Atkinson, 2009)
If households have a higher propensity to spend out of current income than firms, afalling wage share is linked to weaker aggregate demand (e.g. Hobson, 1909; Kalecki,1954; Kaldor, 1966)
If firms’ investment spending is sensitive to profits, a falling wage share may be linked tostronger aggregate demand (e.g. Bhaduri and Marglin)
September 2015 4 / 47
Income distribution and macroeconomic instability?
The Bhaduri-Marglin model
Propensity to save out of profits is larger than propensity to save out of wages
Investment depends on profit share and capacity utilisation
Capacity utilisation is endogenous even in the long run
σ =SK
=sΠΠ + sW(Y −Π)
K= [sW + (sW − sΠ)h]u/v (1)
g =IK
= α+ βu + τh (2)
u∗ =α+ τh
[sW + (sW − sΠ)h]1/v− β(3)
h = ΠY ; u = Y
Ypot ; v = KYpot ; 0 < sW < sΠ < 1
A rise in the profit share (= fall in the wage share) can have either expansionary orcontractionary effects
Profit-led growth: Strong positive investment effects of rise in profit share
Wage-led growth: Large discrepancy between propensities to save out of profits and wages
In an open economy context, profit-led growth (wage-led growth) will be associated witha current account deficit (surplus)
Income distribution and macroeconomic instability?
Personal income distribution and aggregate demand
Rational expectations models see no link between inequality and current account
Keynesians often assume a positive link between personal inequality and the householdsaving rate because “the rich save more than the poor”
With upward-looking status comparisons, there may be a negative link between personalinequality and household saving rate (“expenditure cascades” model by Frank et al., 2010)
Link between rising (top-end) income inequality and decline in saving (and rise inhousehold debt) prior to Great Recession (e.g. Palley, 1994; Cynamon and Fazzari, 2014;Fitoussi and Stiglitz, 2009; Rajan, 2010; Kumhof and Ranciere, 2015; Stockhammer,2013)
September 2015 6 / 47
Income distribution and macroeconomic instability?
September 2015 7 / 47
Income distribution and macroeconomic instability?
The relative income hypothesis (James Duesenberry, Robert Frank)
Higher (permanent) income inequality can lead to
Lower savingHigher debt(A higher labour supply)
Households build consumption norms by looking at the consumptionof other housholds just above them in the income distribution as aresult of “positional concerns” (R. Frank)
Expenditure cascades?
“Expenditure cascades” can start at the very top and go all the waydown the income distribution (R. Frank)
Strength of “expenditure cascades” depends on
where the shift in inequality occurs (top-middle-bottom)norms and institutions
Income distribution and macroeconomic instability?
The expenditure cascades model (Frank et al., 2014)
Consumption demand of household i, Ci, depends on:
its own income, Yi (+)
the consumption of households with a marginally higher income, Ci+1 (+)
CN = kYN for i = N (4)
Ci = k(1− α)Yi + αCi+1 for i = 1, ...,N − 1; 0 < α < 1 (5)
A rise in top income shares exerts downward pressure on the saving rates of allhouseholds below the top, but α depends on institutions
A rise in the Gini may have little effect on the aggregate saving rate
When firms retain their profits rather than passing them on to top income households,expenditure cascades may be weaker (the “corporate veil”), i.e., corporate governanceinstitutions matter
In an open economy context, (the absence of) expenditure cascades will be associatedwith a current account deficit (surplus)
Income distribution and macroeconomic instability?
September 2015 10 / 47
Income inequality in the United States and Germany
Gini coefficients of income inequality, mid-1980s and late2000s
0.20
0.25
0.30
0.35
0.40
0.45
0.50
Gin
i coe
ffici
ents
, mid
−19
80s
and
late
200
0s
Mex
ico
Uni
ted
Stat
esIs
rael
Uni
ted
King
dom
Italy
Aust
ralia
New
Zea
land
Japa
nC
anad
aG
erm
any
Net
herla
nds
Fran
ceLu
xem
bour
gFi
nlan
dH
unga
rySw
eden
Cze
ch R
epub
licBe
lgiu
mN
orw
ayD
enm
ark
Source: OECD Database on Household Income, Distribution and Poverty, own calculations
Gini coefficients of income inequality
Income inequality increased in most, but not all OECD countries
→ Inequality has increased to a similar degree in the U.S. and Germany
→ Strong increase in income inequality in New Zealand, Finland and Sweden
→ Little change in income inequality in France, Hungary and Belgium
September 2015 11 / 47
Outline
I. Macroeconomic implications of income inequality
Income distribution and macroeconomic instability?
Income inequality and macroeconomic instability in the United States
Income inequality and macroeconomic instability in Germany
Income distribution in an open-economy SFC model
II. Income distribution and current account imbalances
Introduction and literature
Descriptive analysis/illustration of hypotheses
Estimation methodology
Estimation results
Conclusion
September 2015 12 / 47
A closer look at the United States
Personal and functional income distribution, USA, 1970-2012
0
10
20
30
40
50
Top
inco
me
shar
es
1970 1975 1980 1985 1990 1995 2000 2005 2010
Top 10% income share Top 5% income share Top 1% income share
Source: World Top Incomes Database, own calculations
United States
50
55
60
65
70
75
80
Hou
seho
ld d
ispo
sabl
e in
com
e/C
ompe
nsat
ion
of e
mlo
yees
1970 1975 1980 1985 1990 1995 2000 2005 2010
Household disposable income, in % of GDPCompensation of employees, in % of GDP
Source: AMECO Database, own calculations
United States
In the United States, firms have payed rising and extremely high salaries to the new”working rich” (since the early 1980s)
→ Rising top-end household income inequality since early 1980s
→ Rather little change in functional income distribution since early 1980s
September 2015 13 / 47
A closer look at the United States
Household saving and debt, USA, 1970-2012
0
20
40
60
80
100
120
140
Deb
t, in
% o
f hou
seho
ld d
ispo
sabl
e in
com
e
6
8
10
12
14
16
18
20
Sav
ing,
in %
of h
ouse
hold
dis
posa
ble
inco
me
1970 1975 1980 1985 1990 1995 2000 2005 2010
Saving, in % of household disposable incomeDebt, in % of household disposable income
Source: AMECO Database, BIS, own calculations
United States
United States post-1980: Debt-driven consumption and crisis
→ Strong increase in household indebtedness prior to the Great Recession
→ Strongly falling household saving rate prior to the Great Recession
September 2015 14 / 47
A closer look at the United States
Household saving rates, USA, 1917-2012
September 2015 15 / 47
A closer look at the United States
Household debt-to-net worth ratios, USA, 1984-2007
September 2015 16 / 47
A closer look at the United States
Income inequality, household debt and the saving rate -
What happened in the United States?
Mainstream theories of consumption are unable to explain the decline in the householdsaving rate and the rise in household debt in the United States
Persuasive explanation of fall in saving/rise in household debt provided by ”expenditurecascades”/trickle-down consumption models
Expenditure cascades are not about eccentric luxury consumption, but basic middle classneeds (private financing of important positional goods such as education, housing, healthcare, etc. in the United States)
September 2015 17 / 47
Outline
I. Macroeconomic implications of income inequality
Income distribution and macroeconomic instability?
Income inequality and macroeconomic instability in the United States
Income inequality and macroeconomic instability in Germany
Income distribution in an open-economy SFC model
II. Income distribution and current account imbalances
Introduction and literature
Descriptive analysis/illustration of hypotheses
Estimation methodology
Estimation results
Conclusion
September 2015 18 / 47
A closer look at Germany
Personal and functional income distribution, DEU, 1970-2012
0
10
20
30
40
Top
inco
me
shar
es
1970 1975 1980 1985 1990 1995 2000 2005 2010
Top 10% income share Top 5% income share Top 1% income share
Source: World Top Incomes Database, own calculations
Germany
−2
0
2
4
6
8
10
Dis
p. c
orpo
rate
inco
me,
in %
of d
isp.
priv
ate
inco
me
36
38
40
42
44
46
48
Cap
ital i
ncom
e, in
% o
f nat
iona
l inc
ome
1991 1994 1997 2000 2003 2006 2009 2012
Capital income, in % of national incomeDisp. corporate income, in % of disp. private income
Source: AMECO Database, own calculations
Germany
In Germany, firms have accumulated financial assets with their retained profits (duringthe 1980s and 2000s)
→ Top-end personal income inequality has not increased very much
→ Strongly increasing capital income share
September 2015 19 / 47
A closer look at Germany
Top income shares adjusted to take account of retained corporate earnings
0
5
10
15
20
25
30
35
40
45
in %
1995 1998 2007
Source: AMECO Database and World Top Incomes Database, own calculations
Adjusted top income shares, Germany
Top 1% of households Top 5% − top 1% of households
Top 10% − top 5% of households Retained corporate earnings
Trends in top household income shares are not directly comparable across countries
In Germany, the corporate sector has been a persistent net saver since 2002
Retained corporate profits are not counted as household disposable income
→ Top household income shares underestimate the rise in top-end inequality in Germany
September 2015 20 / 47
A closer look at Germany
Sectoral financial balances, Germany, 1991-2013
September 2015 21 / 47
A closer look at Germany
Weak demand for credit due to specific nature of inequality
Very strong increase in the Gini coefficient, but no increase of inequality at the very top(OECD, 2008, 2011)
Lower altitude of “expenditure cascades”Strong decline in relative incomes at the bottom, where households are likelyliquidity constraintIncreased middle class fear of status loss due to strongly declining incomes at thebottom (Groh-Samberg, 2009)
Weak demand for credit due to institutions/norms
Specific German production and economic policy model reinforces fear of status loss andprecautionary saving motive in a context of rising inequality
Firm-specific human capital and low female participation lead to higher risk ofstatus loss in case of (male) unemployment (Carlin and Soskice, 2008)Pension and labour market reforms of 2000s have increased income uncertainty(Deutsche Bundesbank, 2007)No help to be expected from fiscal and monetary policy in case of unemployment(Hein and Truger, 2007; Fitoussi and Stiglitz, 2009)
Personal and functional income distribution
Two types of income inequality and corporate behaviour
In the United States, firms have payed rising and extremely high salaries to the new”working rich” (since the early 1980s)
→ The ”wage share” has remained roughly constant
→ Top-end personal income inequality has skyrocketted
In Germany, firms have accumulated financial assets with their retained profits (duringthe 1980s and 2000s)
→ The ”wage share” has fallen dramatically
→ Top-end personal income inequality has not increased very much
Outline
I. Macroeconomic implications of income inequality
Income distribution and macroeconomic instability?
Income inequality and macroeconomic instability in the United States
Income inequality and macroeconomic instability in Germany
Income distribution in an open-economy SFC model
II. Income distribution and current account imbalances
Introduction and literature
Descriptive analysis/illustration of hypotheses
Estimation methodology
Estimation results
Conclusion
September 2015 24 / 47
A stock-flow consistent macro model
Basic features of the model
Large-scale stock-flow consistent model based on Godley and Lavoie (2007)
Both dimensions of income distribution, personal and functional, are explicitly modeled
We divide the household sector into deciles and trace savings, debt and consumptionthrough time
Three idealized economies (U.S., Germany, China) are modelled as one complete system
Shocks and simulations
Personal income distribution through wage differentials and dividend income
Functional income distribution and corporate saving through aggregate wage share
Consumption-GDP ratio, debt-income ratio, sectoral financial balances and currentaccount balance are obtained through simulation (robustified through comparisonanalysis)
September 2015 25 / 47
A stock-flow consistent macro model
’United States’ ’Germany’ ’China’
Assets andLiabilities Cur
renc
y
Households Ai=1,...,10 Firms A Banks A Households Bi=1,...,10 Firms B Banks B Households Ci=1,...,10 Firms C Banks C Σ
Deposits A +mi,Ad −mA
s 0
B +mi,Bd −mB
s 0C +mC
d −mCs 0
Consumer loans A −li,Ah,d +lAAh,s +lBA
h,s +lCAh,s 0
B +lABh,s −li,Bh,d +lBB
h,s +lCBh,s 0
C +lACh,s +lBC
h,s −li,Ch,d +lCCh,s 0
Business loans A −lAf ,d +lAf ,s 0
B −lBf ,d +lBf ,s 0
C −lCf ,d +lCf ,s 0
Equities A +ei,Ad ∗ pA
e −eAs ∗ pA
e 0
B +ei,Bd ∗ pB
e −eBs ∗ pB
e 0
C +ei,Cd ∗ pC
e −eCs ∗ pC
e 0Capital stock A +kA kA
B +kB kB
C +kC kC
Σ A = vi,Ah = vA
f = 0 = kA + nfaA
B = vi,Bh = vB
f = 0 = kB + nfaB
C = vi,Ch = vC
f = 0 = kC + nfaC
September 2015 26 / 47
A stock-flow consistent macro model
Consumption and the Relative income hypothesis
Consumption of top 10 percent households:
c1,j= o1,j · v1,j
h + κ ·(
1 + gj)· yd1,j
t−1; j = A, ..., C (6)
Consumption of bottom 90 percent households under upward looking status comparisons:
ci,jde = oi,j · vi,j
h + κ ·[1 −
(α0 − α
j1
)]· (1 + gj
) · ydi,jt−1 +
(α0 − α
j1
)·(
1 + gj)· ci−1,j
t−1
i = 2, ..., 10 j = A, ..., C(7)
Calibration of αj1: Influenced by institutional environment, e.g. provision of public infrastructure (schools, health care,
social transfers) and labor market specifications (firm-specific skills, labor market mobility)
Variables: cde Desired level of consumption; vi,jh Decile-specific wealth; ydi,j
t−1 Decile-specific disposable income; ci−1,jt−1
Consumption of reference group
Parameters: o Marginal propensity to consume out of wealth; κ Propensity to consume out of income; α0 natural rate
of imitation; αj1 household-specific penalty term; gj Growth rate
September 2015 27 / 47
A stock-flow consistent macro model: ’The United States’
Debt-income ratios and GDP expenditure approach(Shock on personal income distribution dominates)
0.0
0.4
0.8
1.2
1.6
2.0
2.4
86 88 90 92 94 96 98 00 02 04 06
Debt-to-Income Ratio Country ADebt-to-Income Ratio Decile 1 Country ADebt-to-Income Ratio Decile 2 Country ADebt-to-Income Ratio Decile 3 Country ADebt-to-Income Ratio Decile 5 Country ADebt-to-Income Ratio Decile 7 Country ADebt-to-Income Ratio Decile 10 Country A
.0
.2
.4
.6
.8
86 88 90 92 94 96 98 00 02 04 06
Consumption-to-GDP Ratio Country AInvestment-to-GDP Ratio Country ACurrent Account-to-GDP Ratio Country A
September 2015 28 / 47
A stock-flow consistent macro model: ’Germany’
Debt-income ratios and GDP expenditure approach(Shock on functional income distribution dominates)
0.0
0.4
0.8
1.2
1.6
2.0
2.4
86 88 90 92 94 96 98 00 02 04 06
Debt-to-Income Ratio Country BDebt-to-Income Ratio Decile 1 Country BDebt-to-Income Ratio Decile 2 Country BDebt-to-Income Ratio Decile 3 Country BDebt-to-Income Ratio Decile 5 Country BDebt-to-Income Ratio Decile 7 Country BDebt-to-Income Ratio Decile 10 Country B
.0
.2
.4
.6
.8
86 88 90 92 94 96 98 00 02 04 06
Consumption-to-GDP Ratio Country BInvestment-to-GDP Ratio Country BCurrent Account-to-GDP Ratio Country B
September 2015 29 / 47
A stock-flow consistent macro model: ’China’
Debt-income ratios and GDP expenditure approach(Shock on functional income distribution dominates, financial repression)
0.0
0.4
0.8
1.2
1.6
2.0
2.4
86 88 90 92 94 96 98 00 02 04 06
Debt-to-Income Ratio Country CDebt-to-Income Ratio Decile 1 Country CDebt-to-Income Ratio Decile 2 Country CDebt-to-Income Ratio Decile 3 Country CDebt-to-Income Ratio Decile 5 Country CDebt-to-Income Ratio Decile 7 Country CDebt-to-Income Ratio Decile 10 Country C
.0
.2
.4
.6
.8
86 88 90 92 94 96 98 00 02 04 06
Consumption-to-GDP Ratio Country CInvestment-to-GDP Ratio Country CCurrent Account-to-GDP Ratio Country C
September 2015 30 / 47
Outline
I. Macroeconomic implications of income inequality
Income inequality and macroeconomic instability in the United States
Income inequality and macroeconomic instability in Germany
Income distribution in an open-economy SFC model
II. Income distribution and current account imbalances
Introduction and literature
Descriptive analysis/illustration of hypotheses
Estimation methodology
Estimation results
Conclusion
September 2015 31 / 47
Introduction and literature
Global current account imbalances widely considered to be an importantcontributing factor to the global financial crisis starting in 2007.
It has so far proven difficult to explain the emergence and persistence of theglobal imbalances in a fully satisfactory manner (Phillips, 2013; Chinn et al.,2014).
Different hypotheses about macroeconomic effects of income distribution
Rajan (2010): Bottom and middle income households in the U.S. were able, priorto the financial crisis, to sustain their consumption relative to top incomehouseholds despite declining relative (permanent) incomes, facilitated throughgovernment credit expansion policies. This contributed to current account deficit.Pettis (2013): Current account surpluses of China and Germany are not primarilythe result of household thriftiness, but rather of low wages and household income(relative to profits and corporate income) leading to weak aggregate consumptionrelative to domestic production.
September 2015 32 / 47
Introduction and literature
The current hype about top income shares ...
Atkinson, Piketty and Saez (2011) distinguish between “U-shape” and “L-shape” countriesin terms of top income shares
Kumhof et al. (2012) use top income shares as a proxy of the distribution of incomebetween “investors” and “workers”
... goes a bit too far
Changes in Gini coefficient and top income shares can have very different macroeconomicimplications (expenditure cascades)
Sole focus on top income shares is misleading to the extent that the functionaldistribution has worsened more in the “L-shape” countries than in the “U-shape” countries
September 2015 33 / 47
Outline
I. Macroeconomic implications of income inequality
Income inequality and macroeconomic instability in the United States
Income inequality and macroeconomic instability in Germany
Income distribution in an open-economy SFC model
II. Income distribution and current account imbalances
Introduction and literature
Descriptive analysis/illustration of hypotheses
Estimation methodology
Estimation results
Conclusion
September 2015 34 / 47
Illustration - Top income shares and functional income distribution
Personal and functional income distribution, 1980/3-2004/7
AUS
CAN
CHE
CHN
DEU
DNKESP
FIN
FRA
GBR
ITA JPN
NLD
NOR
NZL
PRT
SWE
USA
ZAF
−4
−2
0
2
4
6
8
10
12
Top
5%
inco
me
shar
e
−8 −4 0 4 8 12
Corporate financial balance, in % of GDP
AUS
CAN
CHE
CHN
DEU
DNKESP
FIN
FRA
GBR
ITAJPN
NLD
NOR
NZL
PRT
SWE
USA
ZAF0
2
4
6
8
10
12
Top
5%
inco
me
shar
e
−20 −16 −12 −8 −4 0 4
Private wage share, in % of GDP
Source: World Top Incomes Database (WTID), AMECO Database and National accounts statistics (OECD), own calculations
Current account deficit countries: Strong increase in top income shares, while thecorporate financial balance (wage share) has increased (declined) less
Current account surplus countries: Increase in top income shares relatively minor, whilethe corporate financial balance (wage share) has increased (declined) strongly
September 2015 35 / 47
Illustration - Top income shares and functional distribution
Heterogeneous relationship between top income share and wage share
0.5
0.0
−0.5
−1.0
−1.5
−2.0
−2.5
Priv
ate
sect
or w
age
shar
e, in
% o
f GD
P
POLS model FE model BE model MG model
Canada China France Germany
Italy Japan United Kingdom United States
Note: The figure shows coefficients and 95% confidence intervals of regressions of the top 1% income share on the private
sector wage share for the period 1972-2007.
September 2015 36 / 47
Illustration - Sectoral financial balances
Current account and corporatefinancial balance, 1980/3-2004/7
AUS
CAN
CHECHN
DEU
DNK
ESP
FIN
FRA
GBRIRL
ITA
JPN
NLD
NOR
NZL
PRT
SWE
USAZAF
−12
−8
−4
0
4
8
12
Cur
rent
acc
ount
bal
ance
, in
% o
f GD
P
−8 −6 −4 −2 0 2 4 6 8 10
Corporate financial balance, in % of GDP
Household and corporate financialbalance, 1980/3-2004/7
AUS
CAN
CHE
CHN
DEU
DNKESP
FIN
FRA
GBR
IRL
ITA
JPN
NLD
NOR
NZL
PRT
SWE
USA
ZAF
−12
−10
−8
−6
−4
−2
0
2
Hou
seho
ld fi
nanc
ial b
alan
ce, i
n %
of G
DP
−8 −6 −4 −2 0 2 4 6 8 10
Corporate financial balance, in % of GDP
Source: AMECO Database and National accounts statistics (OECD), own calculations
Corporate financial balance is positively related to the current account
No systematic relationship between corporate and household financial balance
September 2015 37 / 47
Illustration - Distribution and current account
Top income shares and currentaccount balance, 1980/3-2004/7
AUS
CAN
CHE
CHN
DEUDNK
ESP
FIN
FRA
GBR
ITA
JPN
NLD
NOR
NZLPRT
SWE
USA
ZAF
−12
−8
−4
0
4
8
12
Cur
rent
acc
ount
bal
ance
, in
% o
f GD
P
0 2 4 6 8 10 12 14
Top 5% income share
Private wage share and currentaccount balance, 1980/3-2004/7
AUS
CAN
CHE
CHN
DEU DNK
ESP
FIN
FRA
GBR
IRL
ITA
JPN
NLD
NOR
NZLPRT
SWE
USA
ZAF
−8
−4
0
4
8
12
Cur
rent
acc
ount
bal
ance
, in
% o
f GD
P
−24 −20 −16 −12 −8 −4 0
Private sector wage share, in % of GDP
Source: AMECO Database and National accounts statistics (OECD), own calculations
Top income shares are negatively related to the current account
Private sector wage shares are negatively related to the current account
September 2015 38 / 47
Outline
I. Macroeconomic implications of income inequality
Income inequality and macroeconomic instability in the United States
Income inequality and macroeconomic instability in Germany
Income distribution in an open-economy SFC model
II. Income distribution and current account imbalances
Introduction and literature
Descriptive analysis/illustration of hypotheses
Estimation methodology
Estimation results
Conclusion
September 2015 39 / 47
Estimation methodology
Regression specification
We amend the approach developed by Chinn and Prasad (2003), Gruber and Kamin(2007), Chinn et al. (2007, 2011), Lee et al. (2008), Kumhof et al. (2012), Phillips et al.(2013) and estimate the following models
CAi,t = β0 + Xi,tΓ + β1FUNCTi,t + β2INEQi,t + εi,t (8)
FBHHi,t = β0 + Xi,tΓ + β1FUNCTi,t + β2INEQi,t + εi,t (9)
FBCORPi,t = β0 + Xi,tΓ + β1WSi,t + β2INEQi,t + εi,t (10)
Cross-sectional demeaning in current account regressions: i indexes each country in thesample of J countries
Xi,t = Xi,t −∑J
i=1(GDPi,t ∗ Xi,t
)∑Ji=1 GDPi,t
(11)
September 2015 40 / 47
Estimation methodology
Estimation approach
Model I (4-year non-overlapping averages): Pooled OLS with cluster-robust standarderrors (CGER, 2008) (fixed effects and 2SLS as robustness checks)
Model II (annual data): Pooled GLS with panel-wide AR(1) correction (EBA, 2013)(fixed effects and 2SLS as robustness checks)
Countries: AUS, CAN, CHN, DNK, FIN, FRA, DEU, IRE, ITA, JPN, NLD, NZL, NOR,PRT, ZAF, ESP, SWE, CHE, GBR, USA
Sample period: 1972-2007
September 2015 41 / 47
Outline
I. Macroeconomic implications of income inequality
Income inequality and macroeconomic instability in the United States
Income inequality and macroeconomic instability in Germany
Income distribution in an open-economy SFC model
II. Income distribution and current account imbalances
Introduction and literature
Descriptive analysis/illustration of hypotheses
Estimation methodology
Estimation results
Conclusion
September 2015 42 / 47
Estimation results
Table I: Pooled OLS, 4-year non-overlapping averages, GDP-demeaning, 1972-2007
Notes: Robust standard errors are reported in parentheses. All regressions include a constant term. *, ** and *** denotessignificance at 10%, 5% and 1% levels, respectively.
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Estimation results
Table II: Pooled OLS, 4-year non-overlapping averages, GDP-demeaning, 1972-2007
Notes: Robust standard errors are reported in parentheses. All regressions include a constant term. *, ** and *** denotessignificance at 10%, 5% and 1% levels, respectively.
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Contribution analysis
−.08
−.06
−.04
−.02
0
.02
.04
.06
.08
.1
Cur
rent
acc
ount
/GD
P
1980−83 1984−87 1988−91 1992−95 1996−99 2000−03 2004−07
United States
Net foreign assets Relative output Output growth
Dependency ratio Population growth Terms of trade
Private credit Fiscal balance Corporate balance
Top 1% income share
−.08
−.06
−.04
−.02
0
.02
.04
.06
.08
.1
Cur
rent
acc
ount
/GD
P
1980−83 1984−87 1988−91 1992−95 1996−99 2000−03 2004−07
United States
Net foreign assets Relative output Output growth
Dependency ratio Population growth Terms of trade
Private credit Fiscal balance Corporate balance
Gini coefficient
Notes: Note: The figure shows the estimated contribution of the explanatory variables to the current account for theperiod 1980/3-2004/7 (four-year averages).
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Contribution analysis
−.08
−.06
−.04
−.02
0
.02
.04
.06
.08
.1
Cur
rent
acc
ount
/GD
P
1980−83 1984−87 1988−91 1992−95 1996−99 2000−03 2004−07
Germany
Net foreign assets Relative output Output growth
Dependency ratio Population growth Terms of trade
Private credit Fiscal balance Corporate balance
Top 1% income share
−.08
−.06
−.04
−.02
0
.02
.04
.06
.08
.1
Cur
rent
acc
ount
/GD
P
1980−83 1984−87 1988−91 1992−95 1996−99 2000−03 2004−07
Germany
Net foreign assets Relative output Output growth
Dependency ratio Population growth Terms of trade
Private credit Fiscal balance Corporate balance
Gini coefficient
Notes: Note: The figure shows the estimated contribution of the explanatory variables to the current account for theperiod 1980/3-2004/7 (four-year averages).
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Outline
I. Macroeconomic implications of income inequality
Income inequality and macroeconomic instability in the United States
Income inequality and macroeconomic instability in Germany
Income distribution in an open-economy SFC model
II. Income distribution and current account imbalances
Introduction and literature
Descriptive analysis/illustration of hypotheses
Estimation methodology
Estimation results
Conclusion
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Conclusions
Main results
An increase in personal income inequality leads to a decrease of the current account,ceteris paribus
The explanatory power of top income shares is higher for some countries than that of theGini coefficient
An increase in the corporate financial balance leads to an increase in the current accountbalance, ceteris paribus
An fall in the wage share leads to an increase in the current account balance, ceterisparibus
The joint effects of changes in personal and functional income distribution contribute tothe explanation of the global current account imbalances observed prior to the GreatRecession
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