Redistribution in a Neo‐Kaleckian Two‐Country Model

30 Pages Posted: 20 May 2014

See all articles by Daniele Tavani

Daniele Tavani

University of Utah

Laura Carvalho

Sao Paulo School of Economics - FGV

Date Written: July 2014

Abstract

We investigate the interaction between demand‐driven growth and income distribution in open economies, by combining expenditure‐switching and demand spillover effects in a neo‐Kaleckian two country model. First, we specify elasticities of wage share and real exchange rate to the money wage relative to labor productivity, in order to precisely describe the distributive pass‐through from money wages to the labor share and the real exchange rate. Second, we analyze the demand effects of an increase in the money wage for given labor productivity (a redistribution towards labor) in both Home and Foreign country, as well as globally. We derive closed form results for two identical countries. These results indicate that redistribution towards labor at Home: (i) always increases growth globally if Home is wage‐led, but can lead to lower growth at Home relative to Foreign; and (ii) will always imply lower growth at Home relative to Foreign if Home is profit‐led, but can still be growth‐enhancing at Home. Thus, to the extent that countries are concerned with their relative economic performance, a fallacy of composition can emerge. Numerical simulations suggest that these fallacies could indeed occur. As a consequence, ‘returns to coordination’ over international labor policies might be substantial.

Suggested Citation

Tavani, Daniele and Carvalho, Laura, Redistribution in a Neo‐Kaleckian Two‐Country Model (July 2014). Metroeconomica, Vol. 65, Issue 3, pp. 430-459, 2014, Available at SSRN: https://ssrn.com/abstract=2438986 or http://dx.doi.org/10.1111/meca.12047

Daniele Tavani

University of Utah

1645 E. Campus Center
Salt Lake City, UT 84112
United States

Laura Carvalho

Sao Paulo School of Economics - FGV ( email )

984, Perdizes
Sao Paulo, 05014-901
Brazil

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