Omitted-variable bias in demand-regime estimations: the role of household credit and wage inequality in Brazil

Abstract

In the Kaleckian theoretical framework, an economy's demand regime is characterized as either wage-led or profit-led depending on the relative effect of an increase in the wage share on consumption, investment, and net exports. Based on this framework, a vast empirical literature has focused on estimating demand regimes in numerous countries. Although they contribute to a better understanding of the relationship between distribution and demand in different economies and time periods, they also face various critiques on theoretical and methodological grounds. This paper aims to address one dimension of these critiques by investigating a potential omitted-variable bias in the estimated relationship between distribution and demand in the Brazilian economy between 1997 and 2014. Our results suggest that when controlling for some of the relevant factors in Brazil's inclusive growth experience of the early twenty-first century, namely wage inequality, commodity prices, and household credit, the empirical characterization of the Brazilian demand regime as profit-led loses its statistical significance. Also, the demand-regime definition was found to be most sensitive to intra-wage distribution, confirming previous findings in the Kaleckian empirical literature for the Brazilian case.

Partial identification for growth regimes: The case of Latin American countries

“…I show contradictory results for Brazil, Chile, Ecuador, and Mexico. Burle and Carvalho (2021) show that the regime for Brazil cannot identify either regime, although Tomio (2020) identifies a wage‐led regime and de Jesus et al. (2017) evidence a profit‐led regime.…”

“…I show contradictory results for Brazil, Chile, Ecuador, and Mexico. Burle and Carvalho (2021) show that the regime for Brazil cannot identify either regime, although Tomio (2020) identifies a wage-led regime and de Jesus et al ( 2017) evidence a profit-led regime. This same contradiction is evident for Mexico with a wage-led regime of Alarco Tosoni (2016) and, Sánchez and Luna (2014) and Luyano Cuevas and Herrera Revuelta (2018) find the profit-led regime for Mexico.…”

“…Other proposals (not recursive) include some short‐ or long‐run restrictions on the entire system of equations that condition the results on the objective variable (see Kilian & Lütkepohl, 2017, chapters 8‐12). Stockhammer and Onaran (2004) and Burle and Carvalho (2021) used this approach to estimate the effect of the distribution on output and identify the growth regimes. The problem with this identification is that it may be sensitive to the order of occurrence of the shocks and could produce inconsistent estimations.…”

New Developmentalism: What Do We Know and Where Are We Going?

“…A second gap that is even more evident is the scarcity of studies that address the other macroeconomic prices that are important for the growth of national economies, as pointed out by the New Developmentalism Theory [53]. These prices that are listed as: Profit Rate; Interest Rate; Wage Rate; and Inflation Rate, present few studies, if compared to the studies focused on the Exchange Rate for example [13,46,54,55]. Thus, studies are needed on each of these items to determine how to identify the right prices [5] at different times and contexts, the relationships and influences that each price has on the development of nations, and their direct and indirect impacts on issues linked to industrialization, inflation, and investments in an economy.…”