An Empirical Characterization of Redistribution Shocks and Output Dynamics

Klemens Hauzenberger and Robert Stehrer

No 68, wiiw Working Papers from The Vienna Institute for International Economic Studies, wiiw

Abstract: What are the economic effects of redistributing one dollar from profits to labour income? We address this question for the post-World War II economies of the United States and Canada within a structural VECM procedure allowing for up to two breaks of unknown timing. In the United States the short-run spending effect on growth, set in motion by higher labour income, is strong enough to make such a redistribution an attractive, maybe provocative, policy alternative. Across the border in Canada, however, the negative medium-run capacity effect, brought about by diminished profits, dominates the picture more or less from the beginning and output slumps considerably, a result actually suggesting a - maybe even more provocative - redistribution towards profits. We discuss several possible explanations such as the formation of expectations and the different exposure to international trade. Methodologically, we provide a novel procedure to estimate cointegrating rank and break dates jointly.

Keywords: redistribution; structural VECM; joint estimation of cointegrating rank and multiple break dates (search for similar items in EconPapers)
JEL-codes: C32 C53 E12 E25 (search for similar items in EconPapers)
Pages: 47 pages including 6 Tables and 4 Figures
Date: 2010-08
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