Abstract
This paper studies the consequences of growth promoting policies for income distribution, aggregate savings, and the balance of payments in a small open economy. We focus on the case of a reduction in capital income taxation. Then the traditional OLG model, which emphasizes the inter-generational distribution, predicts that both investment and consumption are boosted. It is obvious then that the trade balance deteriorates. However, we show that this result is no longer robust if one allows for heterogeneity of agents within each generation. Then the intra-generational distribution effect, which implies a negative relationship between the share of capital income and aggregate consumption, may cause consumption to decline, and the trade balance to improve. This effect concurs with the classical, or “post-Keynesian” view on the relationship between distribution and savings. This post-Keynesian effect is, however, important for the short run only; the long-term result for the trade balance is not essentially changed by allowing for intra-generational heterogeneity.
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van Ewijk, C. Growth promoting policies, distribution, and the balance of payments. Zeitschr. f. Nationalökonomie 60, 55–80 (1994). https://doi.org/10.1007/BF01228025
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DOI: https://doi.org/10.1007/BF01228025