When Aiyagari meets Piketty: Growth, Inequality and Capital Shares

63 Pages Posted: 17 Mar 2021

See all articles by Toni Juuti

Toni Juuti

Labour Institute for Economic Research

Kari Heimonen

University of Jyväskylä

Juha-Pekka Junttila

University of Oulu - Department of Economics, Accounting and Finance; University of Jyväskylä - Jyväskylä International Macro & Finance Research Group (JyIMaF)

Teemu Pekkarinen

Massachusetts Institute of Technology (MIT)

Date Written: February 02, 2021

Abstract

We incorporate the division of income between capital and labor into analysis on the relationship between inequality and growth. Using historical data, we document that changes in the top 1 % income shares are positively associated with subsequent growth of per capita GDP when the capital share of income is low, whereas under high capital share, the association is negative. We show that these findings are compatible with a theoretical analysis that emphasises how changes in the distribution of income translate into the accumulation of capital and overall economic activity through the interplay between precautionary saving motives and consumption smoothing. We also investigate how accounting for financial frictions affects our main findings.

Keywords: Economic growth, Inequality, Top income shares, Capital shares

JEL Classification: D31, E21, E25, O15

Suggested Citation

Juuti, Toni and Heimonen, Kari and Junttila, Juha-Pekka and Pekkarinen, Teemu, When Aiyagari meets Piketty: Growth, Inequality and Capital Shares (February 02, 2021). Available at SSRN: https://ssrn.com/abstract=3782991 or http://dx.doi.org/10.2139/ssrn.3782991

Toni Juuti (Contact Author)

Labour Institute for Economic Research ( email )

FIN-00530 Helsinki
Finland
+358409402853 (Phone)

HOME PAGE: http://https://labour.fi/author/toni-juuti

Kari Heimonen

University of Jyväskylä ( email )

Seminaarinkatu 30
Jyväskylä, 40100
Finland

Juha-Pekka Junttila

University of Oulu - Department of Economics, Accounting and Finance ( email )

P.O. Box 4600
Oulu, 90014
Finland

University of Jyväskylä - Jyväskylä International Macro & Finance Research Group (JyIMaF) ( email )

PO Box 35
Jyväskylä
Finland

Teemu Pekkarinen

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

HOME PAGE: http://www.teemupekkarinen.com

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