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.
JEL-Codes:D31 D33 E12 E21 E25 E64
Research group:Macroeconomics and European Economic Policy