Chapter 9 Macroeconomics of distribution and growth

This chapter reviews various interactions between the distribution of income across individuals and factors of production on the one hand, and aggregate savings, investment, and macroeconomic growth on the other. Tractable models necessarily focus on specific causal channels within this complex web of interactions, and the survey is organized around a few relevant methodological insights. In a “neoclassical” economy where all intra- and intertemporal markets exist and clear competitively, all distributional issues should be resolved before market interactions address the economic problem of allocating scarce resources efficiently, and the dynamics of income and consumption distribution have no welfare implications. Other models, recognizing that market interactions need not maximize a hypothetical representative individual's welfare, let accumulated and nonaccumulated factors of production be owned by individuals with exogenously or endogenously different saving propensities, and feature interactions between the personal and functional distribution of resources and macroeconomic accumulation. Furthermore, rates of return to savings and investments are generally heterogeneous when they are only partially (if at all) interconnected by financial markets, as is the case in overlapping generation economies, in models with binding self-financing constraints, and in models where financial market imperfections let individual consumption flows be affected by idiosyncratic uncertainty. The chapter also reviews models where distributional tensions, far from being resolved ex ante, work their way through distortionary policies and market interactions to bear directly on both macroeconomic dynamics and income distribution. Finally, it relates theoretical insights to recent empirical work on cross-country growth dynamics and on relationships between within-country inequality and macroeconomic performance.