Effects of wealth distribution on economic activity: extensions to a baseline model

Abstract

Despite the distribution of income and its relation to economic growth has been studied in economic science for a long time, as with Smith, Ricardo and Marx, wealth distribution has often been marginalized in the economic literature. Nevertheless, in a context in which wealth has become even more concentrated Piketty (2014), it is essential to include this variable to understand the economic activity. In addition to that, financial sector has become an important part of the economy in recent years. According to Krippner (2005) the proportion of the financial profit in the industry doubled from 1980's until early 2000's. In Brazil, according to data from Anbima, financial wealth was around 35% of GDP in 2015. However, 30% of this wealth is possessed by 0,1% of people. Taylor et al (2014,2015) and Piketty et al (2017) understand that even if wages of the poorest households were to increase or a rise in the taxes in the wages of the richest, the impact in inequality would not be strong, since households in the top percent earned income from proprieties and dividends. In accordance with Medeiros et al (2015) and Castro e Medeiros (2016), the same happens in Brazil. Although personal wage income has become more equal in the beginning of the century, when incomes over wealth are included the Gini Index remained stable along the period. The model developed in this paper evaluates how distribution of wealth affects aggregate demand, economic growth, as others distributive variables. This model has three classes, two of them conflict the wages and the third class received redistributed profits. One of the classes who earns wage and the third class have a propensity to consume out of income smaller than one. Then, these classes allocate these savings in public bonds and money. Besides that, investment decisions are given in accordance to Kalecki-Steindl function. At last, government collects taxes on wages, financial income, redistributed profits, and financial wealth. Government expenditure is determined from a deficit (surplus) target form a proportion of output. During the time in Paris, the government sector will be better specied, by distinguishing between Treasury and Central Bank. On the one hand, this will allow us to assess how tax, scal and transfer shocks affect other variables. On the other hand, the better treatment of the Central Bank will allow us to deal with monetary aspects. Then, when introducing a banking sector, consumption and investment will also be affected by credit. This will change capacity utilization and economic growth. In addition, credit will affect the distributive variables of the model, as the creditor class will receive interest payments from the debtor class. (AU)