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

  • Christopher Brown
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    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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    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. Davidson, Paul, 1972. "Money and the Real World," Economic Journal, Royal Economic Society, vol. 82(325), pages 101-15, March.
    2. 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.
    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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