Inequality and Finance in Macrodynamics

This introduction addresses various aspects of income and wealth inequality and their developments in Germany and the United States. In both countries the distribution of income and wealth has become more unequal during the past decades. We observe some changes in the figures especially for Germany indicating a more unequal situation at present. This holds for both, the income and the wealth inequality measures. Even though redistribution instruments reduce the Gini coefficient for the disposable income compared to the market outcome, there still is an almost steady increasing trend since the middle of the 1980s. Regarding wealth inequality, the ratio of mean to median net wealth reveals values above the OECD average for Germany and the United States. Both, income and wealth inequality are, however, more pronounced in the US.

We follow the framework of Afonso et al. (Public Choice, 123(3–4):321–47, 2005), to look at the public expenditure of 20 OECD countries for the period 2009–2013, from an efficiency perspective. We construct Public Sector Performance and Public Sector Efficiency indicators and use Data Envelopment Analysis. The results show that the only country that performed on the efficiency frontier is Switzerland, Canada, Japan, Luxembourg and the United States are also more efficient performers. The average input-oriented efficiency score is equal to 0.732. That is, on average countries could have reduced the level of public expenditure by 26.8% and still achieved the same level of public performance. The average output-oriented efficiency score is 0.769 denoting that on average the sample countries could have increased their performance by 23.1% by employing the same level of public expenditure.

A fiscal rule controlling the government surplus as a function of the deviation of the actual debt ratio from a target level is introduced in an otherwise benchmark endogenous growth model in which productive government expenditures are financed by taxes and government debt. This generates a feedback mechanism from the government debt ratio to expenditure that can generate impasse-singular dynamics, in the sense that rates of growth can become locally infinitely valued. We characterize locally the different impasse-singular dynamics that can exist and discuss their consequences for the existence and characterization of general equilibrium endogenous growth paths, for different parameterizations of the fiscal rule. We present some consequences of impasse-singular dynamics generated by particular fiscal rules, which are not present in regular models: existence of multiple over-determinate balanced growth paths (BGP), existence of constraints in the domain of existence of determinate equilibrium paths converging to a regular BGP, and the existence of singular BGP’s.

This paper examines the distributional impact of capital account reforms and the linkage among liberalization, inequality and inclusion in low-income countries. Using a panel data for 29 low-income countries from 1970 to 2010, we find that capital account liberalization reforms are associated with statistically significant and persistent increase in income inequality in both short and medium term. We also highlight that the level of financial development has an important role in determining the response of inequality to liberalization: impact of capital account liberalization on inequality is larger in countries with lower level of credit market development and financial inclusion.

In this paper we analyze effects of public debt on the long-run allocation of resources in a basic endogenous growth model with infinitely lived households. The government levies an income tax and issues government bonds to finance unproductive public spending. We demonstrate that in the case of flexible wages and elastic labour supply the balanced growth rate is the higher the smaller the ratio of public debt to GDP for a given income tax rate. When wages are rigid public debt is neutral in the sense that it does not affect the allocation of resources along the balanced growth path. Finally, in both cases the economy is stable only if the government puts a sufficiently high weight on stabilizing public debt.

This paper develops an endogenous directed technical change growth model with financial intermediation. Technical change is driven by R&D investments of private agents in response to market incentives and can take different directions. Key feature is that innovators are capital constrained and need external funds to finance R&D effort. Financial intermediaries finance these ventures. The main theoretical result shows that credit interest rates—a “risk effect”—add to the determinants of directed technical change: Beside the price and the market size effect, the risk effect encourages innovations in those sectors, where the risk of innovation failure is lower. The degree of substitutability regulates the power of these different effects and determines how innovations respond to changes in relative factor supply, given that the risk effect is an additional determinant of directed technical change.

This paper studies how the upcoming demographic transition will affect the returns to risky capital and safe government debt. Using a neoclassical two-generations-overlapping model, we show that the entrance of smaller cohorts into the labor market will lower both interest rates. The risky rate, however, will react more sensitive than the risk-free rate. Consequently, the risk premium declines when an economy transitions from high fertility to low fertility.

This paper examines the impact of energy resources financing on investment in human capital through the mechanism of growth dynamics. This is done within a context that includes global financial markets and exports of non-renewable energy. These are frequently related to issues of debt accumulation, which naturally raises questions relating to sustainability and welfare—both present and future. Energy export’s contribution to economic growth is emphasized and the distinction between resource-rich and resource-poor countries is highlighted. Major external disturbances for sustained resource-driven development, which can make a country more vulnerable to economic shocks, are discussed. Numerical analysis using Nonlinear Model Predictive Control confirms the empirically observed long-run patterns when non-renewable resources decline monotonically and become depleted. The solutions also confirm typical boom/bust cycle phenomena, where excessive debt may effectively strangle growth. In addition, the implications of investment in human capital for inequality are discussed.

This paper studies the dynamics of sovereign risk, fiscal policy and the macroeconomy in a two-country monetary union framework under the assumption of a heterogeneous perception of the determinants of sovereign risk by the government and the market participants. The macro-economic volatility resulting from various types of fiscal policy rules aimed at the stabilization of sovereign debt is investigated through numerical simulations. Among other things, these simulations show that an extreme focus on debt stabilization can be counterproductive if the financial markets care more about the country’s output gap.

We present a formal model with heterogeneous households examining the dynamics of wealth disparity. We concentrate on financial wealth and study asset accumulation in terms of net wealth. Households borrow to finance investment and consumption. If the asset value is larger then the liability, then new net wealth is accumulated. The question then becomes what variables drive differences in net asset accumulation among households. The returns on assets, saving rates and borrowing capacity are major driving forces behind the differences in asset accumulation among households. The empirical part utilizes US Survey of Consumer Finance (SCF) data and supports the theoretical model. Specifically, the paper finds substantial evidence suggesting that when income groups are subdivided into those that dominantly borrow for consumption and those that dominantly borrow for investment (functioning as consumption smoothers), the former group suffers losses in net wealth while the latter maintains a steady increase in net worth.