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Wealth inequality and aggregate demand

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  • Stefan Ederer
  • Miriam Rehm

Abstract

The paper investigates how including the distribution of wealth changes the demand effects of redistributing functional income. It develops a model with an endogenous wealth distribution and shows that the endogenous rise in wealth inequality resulting from a redistribution toward profits weakens the growth effects of this redistribution. Consequently, a wage‐led regime becomes more strongly wage‐led. A profit‐led regime on the other hand becomes less profit‐led and there may even be a regime switch––in this case the short‐run profit‐led economy becomes wage‐led in the long run due to the endogenous effects of wealth inequality. The paper thereby provides a possible explanation for the instability of demand regimes over time.

Suggested Citation

  • Stefan Ederer & Miriam Rehm, 2021. "Wealth inequality and aggregate demand," Metroeconomica, Wiley Blackwell, vol. 72(2), pages 405-424, May.
    • Handle: RePEc:bla:metroe:v:72:y:2021:i:2:p:405-424
    DOI: 10.1111/meca.12326
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    Cited by:

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    2. Kapeller, Jakob & Leitch, Stuart & Wildauer, Rafael, 2023. "Can a European wealth tax close the green investment gap?," Ecological Economics, Elsevier, vol. 209(C).

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    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy

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