Financialization, dividends, and accumulation of capital

Abstract

The article proposes a stock-flow consistent macroeconomic modeling of a financialized growth regime. The different effects of financialization are studied in open economies with interest rates, share prices, credit, capital accumulation, and income distribution. The structural characteristics of the financialized growth regime, such as financial accumulation, shareholder power, and international competition, remain heavy brakes on investment and employment. Using the model, we measure the consequences of dividend reduction. In a financialized growth regime, a reduction in dividends would allow a return to full employment throughout the eurozone. However, this policy would have to be accompanied by a reduction in firms’ financial accumulation and by a fiscal stimulus policy. In order to achieve a satisfactory social situation, a major institutional change appears essential.

Keywords:

• Income distribution
• institutions
• macroeconomic models

JEL CLASSIFICATIONS:

• E12
• E44
• B52

Notes

1 This constraint depends on the institutional rules and the role assigned to the central bank.

2 We refer here to numerical theoretical SFC models. Empirical SFC models are calibrated by estimating coefficient values using standard econometric techniques.

3 The model runs over the period 3-20. We present here the baseline scenario corresponding to calibration 1. In order to test the robustness of the model, we calibrated the model in three different ways. Details of the three calibrations are given in Table 2.

4 The equation of firm margin is presented in the section on the behavioural relationship.

5 It should be noted that without asymmetric size effects, the differences in income and prices between the two countries would also have created trade imbalances. Size effects accentuate the imbalances and the effects on the smaller country's exports of a change in income in the larger country.

6 The complete model can be found in the Appendix. Simulations in Eviews are available upon request.

7 The rate of profit can be broken down as follows:

$$\frac{\mathrm{UP}}{\mathrm{K}}=\frac{\mathrm{UP}}{{\mathrm{Y}}_{\mathrm{r}}.\mathrm{Pp}}\frac{{\mathrm{Y}}_{\mathrm{r}}}{{\mathrm{K}}_{\mathrm{r}}}\frac{\mathrm{Pp}}{\mathrm{P}}$$

With $\mathrm{K}={\mathrm{K}}_{\mathrm{r}}\mathrm{P}$ and $\mathrm{Y}={\mathrm{Y}}_{\mathrm{r}}\mathrm{P}\mathrm{p}$

8 The price of capital is assumed to be identical to the prices of consumption, government expenditures and exports. In the model, there are 2 prices: the price of GDP (Pp) and the price of consumption (P). For simplicity’s sake, we assume that the price of capital is the same as the price of consumption. The relative price of capital (GDP price compared to the price of capital) is a component of the profit rate and therefore one of the determinants of capital accumulation.

9 The profitability of the shares is given by the following formula:

${\mathrm{re}}^{\mathrm{F}}=\frac{\Delta {\mathrm{pe}}^{\mathrm{F}}}{{\mathrm{pe}}_{-1}^{\mathrm{F}}}+\frac{{\mathrm{DIV}}^{\mathrm{F}}}{{\mathrm{pe}}_{-1}^{\mathrm{F}}{\mathrm{E}}_{-1}^{\mathrm{F}}}$              (2)

Pe = price of shares, DIV = dividends, E = quantity of shares issued

10 These revenues correspond to seignoriage incomes.

11 In the investment function, parameter k6 falls from 8% in the baseline to 2% in scenario 2 and parameter k7 falls from 0.8% in the baseline to 0.2% in scenario 2.

12 Dividends are reduced in period 10.

13 The three calibrations are shown in Table 2.

14 Figure 7 shows the effects of a dividend reduction on investment.

15 The relative unemployment formula is as follows:

$$\frac{\mathrm{unemployment} \mathrm{scenario}-\text{unemployment baseline}}{\text{unemployment baseline}}\times 100$$

16 Unlike the other variables studied, the trade balance can be negative. We therefore use the following formula: $\mathit{trade} \mathit{balance} \left(in \mathit{percent}\mathit{\text{ of }}\mathit{gdp}\right)s\mathit{cenario}-\mathit{trade} \mathit{balance}(in \mathit{percent}\mathit{\text{ of }}\mathit{gdp}) \mathit{baseline}$

17 Some financial investments are actually of an industrial and/or strategic nature.

Additional information

Notes on contributors

Vincent Duwicquet

Vincent Duwicquet is at CNRS, UMR 8019, CLERSE - Centre Lillois d’Études et de Recherches sociologiques et Économiques, University of Lille, Lille, France.