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Wage‐led versus profit‐led demand: A comprehensive empirical analysis

Cem Oyvat (), Oğuz Öztunalı and Ceyhun Elgin

Metroeconomica, 2020, vol. 71, issue 3, 458-486

Abstract: This study investigates various economic factors’ impact in determining the relationship between functional income distribution and aggregate demand from both a theoretical and an empirical viewpoint. We base our analysis on a demand‐driven growth model for an open economy that allows for either profit‐led or wage‐led regimes. Our results strongly indicate that a higher level of trade openness is associated with a lower probability of being wage‐led. We find evidence that lower wage inequality makes an economy more wage‐led and that countries with a greater private credit‐to‐gross domestic product (GDP) ratio are more likely to be profit‐led.

Date: 2020
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Handle: RePEc:bla:metroe:v:71:y:2020:i:3:p:458-486