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Does income distribution matter for effective demand? Evidence from the United States

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  • Christopher Brown
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    Abstract

    This article examines the influence of income distribution in the determination of effective demand in the US. A simple model is developed to simulate the effects of changing income inequality on the aggregate propensity to consume. The simulation results illustrate that income inequality has a substantial negative impact on consumption when household spending is assumed to be income-constrained. Econometric evidence is presented that rising private sector wage inequality had a dampening effect on the time path of consumption in the United States between 1978 and 2000. The methodology entails time series estimation of consumption specifications with a measure of income inequality (the Theil index) included among the explanatory variables. The argument is made that, ceteris paribus, rising income inequality creates a need for greater reliance on debt to sustain a given level of household spending.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/0953825042000225607
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Review of Political Economy.

    Volume (Year): 16 (2004)
    Issue (Month): 3 ()
    Pages: 291-307

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    Handle: RePEc:taf:revpoe:v:16:y:2004:i:3:p:291-307

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    1. Jean-Marc Burniaux & Thai-Thanh Dang & Douglas Fore & Michael F. Förster & Marco Mira d'Ercole & Howard Oxley, 1998. "Income Distribution and Poverty in Selected OECD Countries," OECD Economics Department Working Papers 189, OECD Publishing.
    2. Davidson, Paul, 1972. "Money and the Real World," Economic Journal, Royal Economic Society, vol. 82(325), pages 101-15, March.
    3. Peter Gottschalk & Timothy M. Smeeding, 1997. "Cross-National Comparisons of Earnings and Income Inequality," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 633-687, June.
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    Cited by:
    1. Steven Pressman, 2013. "Justice and History: the big problem of Wilt Chamberlain," Economic Issues Journal Articles, Economic Issues, vol. 18(1), pages 1-16, March.
    2. Steven Fazzari & Barry Z. Cynamon, 2013. "Inequality and Household Finance during the Consumer Age," INET Research Notes 23, Institute for New Economic Thinking (INET).

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