This project deals with two intrinsically linked issues: the endogeneity of the demand regime and the personal distribution impact on aggregate demand. By microfounding the savings function, the aggregate savings rate is an increasing function of the Gini index, which in turn is decomposed as a function of the functional income distribution and the Gini indices for wages and profits. By assuming that saving is a function of personal rather than functional income distribution, an increase of the labour share is effective in boosting consumption and aggregate demand, not per se, but only as long as it reduces personal inequality. As the labour share increases, depending on the distribution of wages and profits, both the demand regime type - the sign of the slope of the demand schedule - and its strength- the size of the slope of the demand schedule - can endogenously change. Concerning the former, there can be a threshold value for the wage share beyond which there is a shift from wage-led to profit-led demand. The analysis shows that, unlike most Kaleckian models, profit inequality is just as important as wage inequality in determining the demand regime type and its strength.
This research project tries to offer a more comprehensive framework that, linking functional to personal distribution of income, addresses the issue of the distribution impact on aggregate demand and, in particular, on consumption. As the main interest of this research project is the impact of distribution on aggregate demand,
the other side of the coin, the so-called distribution schedule, is simply taken as flat. This project has a fourfold contribution. First, if the aggregate saving rate is a function of personal income distribution rather than functional distribution, it shows how endogenous regime changes may
arise naturally without the need of further assumptions regarding the investment function. Second,
even if such regime change does not occur, it shows that the degree of wage or profit-ledness of the
demand regime - its strength - may not be constant. Third, it shows that in determining the regime type and its strength a symmetric role is played by wage and profit inequality, esdpite the role of the latter is neglected in the literature. Lastly, it offers a more general and comprehensive
way of dealing with personal distribution as any kind of distribution can be virtually represented within the model.
At the empirical level, the project aims to extend the existing literature in the various points in which it is lacking. In particular, with regard to the estimation of different demand regimes (wage-led/profit-led), the empirical literature, just as its theoretical counterpart, tends to estimate models where countries can be either wage-led or profit-led. This is because estimates are generally made with constant coefficient models. On the contrary, a time-varying or markov-switching framework would be more appropriate to analyze cyclical trends and possibly capture changes that have occurred over past decades.