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.
FEPS President at Euronews talk-show ‘Brussels, my love?’
by Euronews 15/01/2024
Panellists discussed topics including EU fiscal rules reform, German farmer's protests, and the decision of Charles Michel to quit his job early to run for MEP.
“Trade doesn’t work in isolation from good domestic policies” Interview to Arancha González
by Borderlex 19/09/2023
Interview to Arancha González, former Spanish foreign minister, who released together with FEPS the new book entitled 'The Trade Handbook: Making Trade Work for Prosperity, People and Planet'
A szociális unió imperatívusza
by Új Egyenlőség 09/09/2023
'The imperative of Social Union'. Article about FEPS book 'Europe’s Social Integration: Welfare Models and Economic Transformations' by László Andor.
Após 66 anos de adiamentos, a barragem do Pisão entrou em contra-relógio
by Pùblico 19/08/2023
'After 66 years of postponements, the Pisão dam has entered a race against time' Pùblico's article mentions FEPS Policy Study 'Governing the RRF'
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