Re-Distribution, Aggregate Demand, and Growth in an Open Economy: The Crucial Interaction of Portfolio Considerations and External Account Constraints

A large body of literature inspired by the seminal contribution of Marglin and Bhaduri (1988) has debated the distributional determinants of demand and growth. A general conclusion has been that open economy considerations weaken the potential for a wage-led growth regime. How- ever, this literature has largely ignored asset portfolio considerations and the stock and flow interactions that result from the feedback from savings to wealth and from wealth to the current account. This paper develops a theoretical framework that speci.es a fuller system of (instantaneous) flow equilibria embedded in a medium-run framework with stable steady state stocks of real and financial assets. The balance of payments constraint that results ensures that simply raising the wage does not yield a higher stock of real capital. A lower mark-up may increase the steady state stock of capital but only through the relative price channel. These results are much stronger than those derived by existing literature, and more importantly, emerge regardless of whether the demand regime is wage-led or profit-led in autarky.