Distribution, Asset Prices, Debt and

Aggregate Demand in OECD Countries

Engelbert Stockhammer & Rafael Wildauer

Kingston University, London

Part of INET project Rising Inequality as a Cause of the Crisis

Motivation

• macro trends over last 30 years

• strong house (and equity price) growth prior to the recession

• strong shifts in functional and/or personal income distribution

• Debates

• Effects of distribution on demand

• Wage-led vs profit-led demand regimes

• Consumpution cascades hypothesis: inequality increases demand

• Finance and growth

• Keynesian theory: debt important in theory (Minsky cycles), but little empirical

• Level vs flow effects of debt

• Wealth effects in mainstream

This paper (contribution)

• extend Bhaduri Marglin framework in order to test

competing hypothesis

• personal income distribution:

Consumption cascades vs Kalecki

• wealth and debt

rational vs no aggregate vs collateral/Minsky vs stock/flow

• Growth drivers (1998-2008): debt-driven growth?

• panel of 18 OECD countries, 1980-2013

Basic Bhaduri Marglin model

� � � �,��, �� �,��, �� � �,��, ���

•��

���� 0;

��

���� 0;

���

���� 0;

• WS ... wage share (W/Y)

• no disagreement over signs of��

���and

��

���

��∗

���� �1/�1 � �2�

• � ���

���

��

���

���

���

• �! ���

��

��

��

���

��

• If � � 0 profit-led demand

• If � � 0 wage-led demand

Effects of inequality and wealth: extending

the Bhaduri Marglin model

• Veblen effect: ‘keeping up with the (richer) Joneses’

• inequality ↑ → consumption emulation → C↑: "�/"# � 0

• that’s ad odds with Kaleckian intuition: "�/"# � 0

• Including wealth and debt

• � � ���,��, #, $�, %�,&$�

• rational wealth effects: �� � $� %� � &$, thus "�/"�$� %�� � �"�/"&$

• no aggregate wealth effects: Buiter (2010): "�/"$� � 0

• Muellbauer: housing is collateral "�/"$� � "�/"%�

• � � ���,��, #, &$, ∆&$�, with "�/"&$ � 0, "�/"∆&$ � 0

• positive flow and negative stock effect

• Debt-led vs debt-burdened demand regimes (Dutt 2006; Nishi 2012)

• Minsky for households: "�/"$� � 0 (and "&$/"$� �� 0)

• Asset-driven growth: if combined effect of

• ()�∆$� (*�∆%� (+)∆&$ �� 0

• for C as well as I

Hypothesis Theoretical prediction Implications

the rich save moreRicher households have a higher

propensity to save.

,-

,.� /

expenditure cascadesHouseholds make consumption

decisions with respect to richer peers.

,-

,.� /

housing wealth is no wealth

Rising house prices lead to wealth effect

for home owners and higher savings of

willing-to-be-homeowners.

,-

,01� /

net wealth effectNet wealth (NW) is the relevant wealth

measures for consumption decisions.

,-

, 01203� �

,-

,41

credit constraints

Due to credit constraints, changes in

housing wealth effect consumption

even if shocks are anticipated.

,-

,01� / and

,-

,01�

,-

,03

Minskyian householdsRising asset prices leads to increasingly

optimistic lending and spending.

,-

,01� /

stock and flow effects of debt

The stock of debt implies interest rate

payments which affect consumption

negatively whereas the flow of debt

affects consumption positively.

,-

,41� / and

,-

,∆41� /

the literature

Empirical literature on Bhaduri-Marglin

models

single equation systems approach Panel

Basic model

(few controls)

Bowles & Boyer 1995Stockhammer & Onaran

2004

Hartwig

2014

Naastepad & Storm 2006/2007 Barbosa-Filho & Taylor 2006

Hein & Vogel Carvalho & Rezai 2014

Stockhammer & Stehrer 2011 Rada & Kiefer 2014

Onaran & Galanis 2012

Financialisation

variables

Hein & Schoder 2011 (USA, D): int, div

Nishi 2012a (J): DOnaran et al. 2011 (USA): int, div, FW,

HW, D

Detailed

treatment of

globalisation

Stockhammer et al. 2009

Stockhammer et al. 2011

Extensions of Bhaduri Marglin model

• Onaran et al 2011: extend BM model to include FW, WH,

rentier payments and incomes for USA

• Nishi 2012: VAR(3) BM model with debt for Japan

• Carvalho and Rezai (2014): VAR(2) BM with regimes

according to high or low personal inequality; USA

Wealth and debt effects in PK literature

• Growing theoretical literature on the effects of finance and debt on growth, but little on consumption• Minsky models (Keen 1995, Fazzari 2006, Charles 2008, Ryoo 2013): business

debt

• SFC models: stock flow norms

• Flow vs stock effects of debt: Dutt (2006), Hein (2012) debt without asset P

• Bezemer et al 2014: panel of 40 countries; growth as function of disaggregated debt; find neg. effect of asset-related debt on growth

• Kim et al (2014): PK theory of consumption based on relative income and rules of thumb; estimate C as function of Y, W, DH, ∆ DH for USA

• Zezza (2009): PE = C+I = f(Y, FAF,G, SP, HP, ∆DH, ∆DB) for USA

• None of them controls for distribution

Mainstream wealth effects literature

• Rich (if recent) empirical literature, but theoretically

ambiguous

• Rational behaviour assumption (HH never worry about bubbles)

• No role for debt in baseline NK models

• Girourard et al 2006, Ludwig and Slok 2004, Slacalek 2009

• Muellbauer 2009: credit constraints

• Use either asset P or wealth

• Find wealth MPC ≈ 0.05

• USA, UK MPC(HW)>>MPC(FW), but not for Eu

Veblen effects? Empirical

• (somewhat) related literature: relative income hypothesis, micro

data, happiness, labour supply

• Effects of income relative to peer group on self-reported happiness (McBride

2001)

• Neumark and Postlewaite 1998: labour supply decisions as depending on

income of husband of sister

• Bowles and Park (2005): labour supply as function of relative income

• Alvarez-Cuadrado et al 2012: micro data consumption as positive function of

average consumption of geographical reference group

• (somewhat) related: current account as negative function of

inequality [motivated by consumption cascades, but not

documented] (Behringer and van Treeck 2013)

• Brown (2004): macro consumption function for USA, finds negative

effect of inequality

Data, Estimation and Results

Data

• 18 OECD countries (AT, AU, BE, CA, CH, DE, DK, ES, FI, FR,

IE, GB, IT, JP, NL, NO, SE, US)

• sample: 1980-2013

• Sources:

• AMECO (national account data)

• OECD (property prices, stock prices, interest rates)

• BIS (household debt)

• World Top Income Database (top income shares)

• IMF (stock price indices)

A Panel Approach

• BM: estimate determinants of each GDP component

• Country fixed effects (FD estimator) and HAC standard

errors

• consumption: � � 5��,��, #, 66, �6, &$�

• investment: � 5��,��, 7, #, 66, �6, &$,&8�

• foreign sector: � 5��5,��, 9:, 66�

; � 5��,��, , 9:, 66�

Comments on panel estimtors

• Panel = impose identical coeffs

• Report MG (mean group) estimator to check robustness of pooling

• We have a macro panel small N, medium T (N=18, T=33)

• Compared to much of the panel literature (assumption of large N) we

have to worry more about TS aspects

• Can’t reject unit roots for our variables

• Estimate FD (first difference) estimator

• Check with dynamic estimators A&H, restricted difference GMM

• Experiment with cointegration estimators (PMG, MG, pooled)

• FD preferred estimator

Results Consumption

Results: Consumption

Interpretation results consumption

• no stable cointegration relationship

• Kalecki effect:��

���� 0supported

• Veblen effect: ��

�=� 0 not supported

• Rational wealth effects: ���

� )�2*���

��

�+)not supported

• Buiter (2010):��

�)�� 0 not supported

• Muellbauer (and Minsky for HH):��

�)��

��

�*�supported

• Debt-led vs debt-burdened: ��

�+)� 0,

��

�∆+)� 0not supported

Results Investment

Results Foreign Sector

Demand regimes (marginal effects)

and

Growth contributions

Private excess demand

• Domestic demand is wage led

• Very open economies can have profit-led demand

Debt-driven growth?

Conclusion

• Functional distribution:

• WS positive on C but modest

• Personal income inequality:

• no stat sign effect (or negative on I)

• robust to using Gini

• Wealth and debt:

• strong and robust asset effect (HW, FW, DH)

• no evidence for -DH , +∆DH in C;

• In decade prior to the crisis: asset price effects are

substantial; effects of functional distribution modest

(asset-driven growth)

Appendix III: Cointegration

Consumption

Investment

Appendix IV: Crisis dummies and

interactions

Appendix V: Investment (construction)

Appendix VI: Investment (non-

construction)

Zezza (2009): USA

Kim et al 2014