Essays on financial macroeconomics and inequality

Abstract

This dissertation is composed of three self-contained chapters on the same topic: the impact of financial markets on inequality. The first paper investigates the connection between the increase of equity wealth, the rise stock-market returns, the slowdown of corporate investment and the decline of the labor share in the U.S. economy. I use a version of the standard heterogeneous-agent model to explain the connection of these phenomena and I identify three driving forces. In particular, I show that the fall of the average marginal tax on capital income, the reduction of stock-market costs and a higher inclination towards corporate short-termism explain the decrease of investment and the rise of equity prices. This way, the model predicts an endogenous upsurge of equity Tobin’s Q and, importantly, the rise of equity returns. The decline of the labor share occurs in response to investment sluggishness when capital and labor are complements, which requires an elasticity of substitution consistent with the values found in the literature. Given the predictions of the model, the paper solves what Joseph Stiglitz has recently called the Piketty puzzle: why has the wealth-output ratio and capital returns increased, while wages have not. The second paper, which is joint work with Pedro Trivin, extends the previous analysis to a panel of countries. We use a reduced-form framework with wealth in the utility function to obtain an estimable equation and, by using recent panel time-series techniques, we find that the increase in Tobin’s Q explain almost 60 per cent of the total decline in the labor share. The third paper makes a theoretical contribution to recent debate on secular stagnation. I use a growth model with imperfect competition to show that the rise of monopoly rents is consistent with several investment and inequality dynamics that have characterized the post-1980 stagnant era.