Wealth inequality and aggregate demand

By Stefan Ederer, Miriam Rehm

PKES Working Paper 1918

October 2019

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 towards 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.

Keywords: Wealth, Distribution, Aggregate Demand

JEL classification: D31 D33 E12 E21 E25 E64