Research Topics

Recent research stresses the macroeconomic dimension of income distribution, but no theory has yet emerged. In this note, we introduce factor shares into popular growth models to gain insights into the macroeconomic effects of income distribution. The cost of modifying existing models is low compared to the benefits. We find, analytically, that (1) the multiplier is equal to the inverse of the labor share and is about 1.4; (2) income distribution matters mostly in the medium run; (3) output is wage led in the short run, i.e., as long as unemployment persists; (4) capacity expansion is profit led in the full-employment long run, but this is temporary and unstable.

Do all types of demand have the same effect on output? To answer this question, I estimate a cointegrated vector autoregressive (VAR) model of consumption, investment, and government spending on US data, 1955–2007. I find that: (1) economic growth can be decomposed into a short-run (transitory) cycle gravitating around a long-run (permanent) trend made of consumption shocks and government spending; (2) the estimated fluctuations are investment dominated, they coincide remarkably with the business cycle, and they are highly correlated with capacity utilization in both labor and capital; and (3) the long-run multipliers point to a large induced-investment phenomenon and to a smaller, but still significantly positive, government spending multiplier, around 1.5. The results cover a lot of theoretical ground: Paul Samuelson’s accelerator principle, John Kenneth Galbraith’s stress on consumption and government spending, Jan Tinbergen's investment-driven business cycle, and Robert Eisner’s inquiries on the investment function. The results are particularly useful to distinguish between economic policies for the short and long runs, albeit no attempt is made at this point to inquire into the effectiveness of specific economic policies.