The paper investigates the effects of changes in the distribution of income and wealth on private aggregate demand, which consists of consumption, investment and net exports. Estimates are based on a panel of 12 EU countries covering the period 1980-2011. The average demand regime is found to be wage led. We find strong effects of debt and property prices. In the period 1997-2007, i.e., the decade prior to the crisis, debt and property prices have been the main drivers of aggregate demand, in particular in the Non-Eurozone and southern European countries. The finding lends support to the hypothesis of the existence of an inherently unstable debt-driven growth model for many countries. This has important policy implications. First, finance and debt are potentially powerful drivers of growth, but they also can undermine economic stability. The financial sector needs to be tightly regulated and monetary authorities have to lean against markets. Second, a wage-led growth strategy is economically feasible. In times of crisis wages should not be cut, but increased steadily. Third, the short-run effects of a wage-led growth strategy would be modest compared to the damage of a financial crisis. Fiscal policy thus is needed for economic stabilisation.
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