Till van Treeck PhD. Student at the Macroeconomic Policy Institute (IMK) in the Hans Boeckler Foundation

Transcription

1 Working Paper 1/2007 Till van Treeck PhD. Student at the Macroeconomic Policy Intitute (IMK) in the Han Boeckler Foundation Reconidering the Invetment-Profit Nexu in Finance-Led Economie: an ARDL-Baed Approach Han-Böckler-Straße 39 D Düeldorf Germany Phone:

2 1 Reconidering the Invetment-Profit Nexu in Finance-Led Economie: an ARDL- Baed Approach Till van Treeck* Atract A imple Pot Keyneian growth model i developed, in which financial variale are explicitly taken into account. Different poile accumulation regime are derived with repect to change of thee variale. Several variant of an invetment function are etimated econometrically. The ARDL-aed approach propoed y Pearan et al. (2001) i argued to e uperior for thi purpoe to the traditional cointegration approach. The econometric reult are dicued with repect to a remarkale phenomenon that can e oerved for ome important OECD countrie ince the early 1980: accumulation ha generally een declining while profit rate have hown a tendency to rie. We concentrate on one potential explanation of thi phenomenon which i particularly relevant for the USA and relie on the hypothei of a high propenity to conume out of capital income. We alo give an alternative explanation of the o-called New Economy oom in the USA at the end of the Key Word: Invetment, Profitaility, Financialiation, Time Serie Econometric. 1. Introduction Since the early 1980, we can oerve a remarkale phenomenon in a numer of important OECD countrie: while accumulation rate have generally een declining, profit hare and rate have hown a tendency to rie. Although thi invetment-profit puzzle ha received curiouly little attention o far (Stockhammer, , p.197) 1, it clearly poe omething of a challenge to traditional Pot Keyneian theory. In effect, proaly the mot ditinguihing feature of Pot Keyneian growth theorie of all provenance 2 i the potulation of a doule-ided relationhip etween the rate of profit and the rate of accumulation (Roinon, 1962, p.12). Mot famouly, the centrepiece of the early Pot Keyneian growth model developed y Roinon (e.g. 1962, 1965), Kaldor (e.g. 1956, 1957, 1961) and Painetti (e.g. 1974) i the Camridge equation : r = g(r e )/ Π, with r = Π/K = realied profit rate, g = I/K = accumulation rate, r e = expected profit rate, and Π = propenity to conume out of profit. In equilirium: r = r e, the accumulation rate i a function of the rate of profit that induce it. On the other hand, the profit rate i a function of the rate of accumulation that generate it (Roinon, 1962, p.48). * PhD tudent, IMK. I am grateful to Malcolm Sawyer and Eckhard Hein for very helpful comment on earlier draft of the paper and to Yongcheol Shin for many dicuion aout the ARDL-aed approach. I am alo indeted to Franck Van de Velde and Laurent Cordonnier who drew my attention to the general topic of thi paper. Of coure, I ear ole reponiility for error and inaccuracie. Finally, I would like to thank the German Academic Exchange Service (DAAD) for financial upport during my tay at the Leed Univerity Buine School (LUBS) during See, however, Duménil and Lévy (2003), Cordonnier (2003), Lavoie (2006, p.20) for dicuion of thi phenomenon. 2 The term Pot Keyneian i ued in an incluive manner, uch a propoed y, e.g., Sawyer (1989) or Lavoie (1992). In particular, the Kaleckian tradition i explicitly included.

3 2 In the more recent Kaleckian model, the rate of capacity utiliation, which i aumed to e, in the long run, at full, or normal, level in the early Camridge model, i endogenied. However, the poitive relationhip etween the accumulation rate and the profit rate i maintained. In the tagnationit variant of the Kaleckian growth model, propagated, amongt other, y Rowthorn (1981), Taylor (1985) and Dutt (1984, 1987), invetment deciion are poitively influenced y retained earning (following the principle of increaing rik ) and ale expectation (ee alo Kalecki, 1954; Steindl, 1976). The correponding general invetment function can e written a: g i = g(r e (r,u)), with u = rate of capacity utiliation. Comining thi invetment function with a aving function of the form: g = S/K = Π r, yield the canonical Kaleckian model (Lavoie, 1992), where an increae in the profit hare adverely affect capacity utiliation, accumulation and profit rate, ceteri pariu. 3 Empirically, however, profit rate have een riing together with profit hare in many countrie ince the early A hown y Bhaduri and Marglin (1990), the tagnationit invetment function effectively implie the retrictive aumption of a trong accelerator effect, if coefficient on oth r and u are to e poitive. Bhaduri and Marglin (1990) ugget the alternative general invetment function: g i = g(r e (h,u)), with h = Π/Y = hare of profit in national income. The reulting model allow for different regime : aggregate demand can e tagnationit (du/dh < 0) or exhilarationit (du/dh > 0), accumulation can e wage-led (dg/dh < 0) or profit-led (dg/dh > 0). Notice that, y definition, r = (Π/Y)(Y/Y * )(Y * /K) = hu/v, with Y * = full capacity output. Therefore, if the full capacity/capital ratio, v, i given, accumulation in the Bhaduri-Marglin invetment function effectively depend only on the actual rate of profit (a in the Camridge model). A a concluion, a divergence of accumulation and profit rate i at firt ight difficult to perceive in thi model a well. In um, two facinating quetion can e formulated: firt, why do firm not invet their profit? Second, how can high (increaing) profit rate e compatile with low (declining) accumulation rate at the macroeconomic level? In an attempt to propoe a potential olution to thee puzzle, the paper proceed a follow: firt, ection 2 offer a rief urvey of ome relevant tylied fact on growth, profitaility and income ditriution in France, Germany, the United Kingdom and the United State from 1960 onward. Particular emphai in thi ection and throughout the paper lie on the phenomenon of financialiation, which can e looely defined a increaing rentier power or, more pecifically, hareholder value orientation. A Kaleckian macro model i developed in ection 3, extending the previou work y Lavoie (1995) and Hein (2006a). The condition for a particular accumulation regime are derived, in which financialiation induce a decline in the accumulation rate while increaing the profit rate. The intuition ehind thi i that a high dividend payout ratio impoed y hareholder on firm ha a depreive effect on invetment ut a high propenity to conume of the recipient of capital income timulate profit. An extenive empirical analyi i provided in ection 4 to 6. Firt, it i argued that the ARDL-aed ound-teting approach recently developed y Pearan et al. (2001) i particularly well uited for etimation of invetment function and overcome many prolem affecting imple partial adutment model or the traditional cointegration approach ued in previou work on related quetion. Etimation of the invetment function from the Camridge model and the Bhaduri-Marglin model confirm the hypothei of a reakdown of the invetment-profit nexu in the early 1980 for all countrie except the UK. For France and the US, where financialiation ha een particularly pronounced, data availaility alo allow etimation of two variant of the invetment function propoed in ection 3. Given the trong degree of financialiation in the US, the trend of accumulation and ditriution in thi country are analyed in ome greater 3 Thi i hown y Blecker (2002) for a imple linear model.

4 3 depth and the accumulation regime comining low accumulation and high profitaility i indeed found to e empirically relevant for plauile value of the propenity to conume out of capital income. Some open quetion are dicued in ection 7, efore ection 8 conclude. 2. Growth, Ditriution, and Financialiation: Stylied Fact It ha ecome common practice to ditinguih three main period of economic development in the advanced indutrialied economie ince the Second World War (ee, e.g., Boyer, 1990, 2000; William, 2000; Setterfield and Cornwall, 2002; Stockhammer, ): the firt three pot-war decade have een laelled the Fordit era 4, or Golden Age of Capitalim 5. They were characteried y high accumulation and output growth and relatively peaceful ocial relation etween laour and capital ( Keyneian compromie ). The year from the late 1960/early 1970 to the early 1980 were a period of crie, with a harp decline in output and capital tock growth, increaingly fierce conflict over the ditriution of income, and high rate of inflation. During the year from the early 1980 onward, which mark the third period, 6 economic growth could e to ome extent tailied, aleit not at rate comparale with thoe of the Fordit era. A ditinguihing feature of thi lat period i the reditriution of income from wage to profit, which ha een (over)compenating the reditriution in the other direction during the Fordit era and the period of crie. Figure 1: Accumulation Rate* 0.15 France Germany Year 0.06 United Kingdom United State Year *Growth rate of uine capital tock, Source: OECD Economic Outlook. Figure 1-2 and tale 1-2 give a more explicit account of the road periodiation ketched aove. Figure 1 and tale 1 how that the lowdown in accumulation and out- 4 The Fordit growth regime ha een analyed within the French regulation chool, in particular y Aglietta (1976). For a urvey, ee Boyer and Saillard (1990). 5 A eminal analyi of the Golden Age i Marglin and Schor (1990). 6 A lucid exploration of economic and ocial implication of thi era i provided y Duménil and Lévy (2001).

5 4 put growth ince the end of the Golden Age ha een particularly pronounced in France and in Germany. In the US, a imilar downward trend can e oerved, although the picture i more complex in thi cae. In particular, during the econd half of the 1990, accumulation rate have come cloe to thoe of the late Fordit era, ut the uequent receion rought accumulation down to a hitorical low point of the pot-war era. The UK i an exception in ome way ecaue it i the only of the four countrie under invetigation that ha not experienced a declining trend of accumulation and output growth. Of coure, the overall macroeconomic performance in thi country had een conideraly weaker than in the three other countrie throughout the Fordit era. Tale 1: Growth of Buine GDP France Germany United Kingdom United State Source: OECD Economic Outlook. Tale 2: Profit Share in the Buine Sector France Germany United Kingdom United State Source: OECD Economic Outlook. Figure 2: Rate of profit* France Germany United Kingdom United State Year *France: Net operating urplu/net capital tock (nonfinancial corporation), Source: French National Account (INSEE); Germany: Income from property and other/uine capital tock, OECD Economic Outlook; UK: Net rate of return, private nonfinancial corporation, Blue Book (ONS); US: Net operating urplu/private fixed aet, NIPA and Fixed Aet Tale (BEA). From figure 2 and tale 2, it i apparent a an overall trend that private enterprie profitaility in term of profit rate and profit hare firt declined from the mid-1960 until the early 1980, efore recovering and peaking in recent year. 7 Simultaneouly and very importantly, ince the early 1980 profit have een increaingly ditriuted to rentier, a defined in tale 3. Thi trend i very ditinct in the US, ut only rather weak in Germany. A triking cae i France, where the rentier income hare ha virtually douled throughout the Figure 3 give ome indication 7 Unfortunately, the quality of the meaure of the profit rate a well a the period for which we were ale to contruct the erie differ.

6 5 aout the compoition of rentier income. In particular, it how that in France and in the US financialiation ha taken the form of a dratic increae in the hare of dividend income in total rentier income relative to the hare of interet income. Tale 3: Rentier Income a a Share of GDP (in per cent) France Germany United Kingdom United State Note: rentier income i defined a profit realized y firm engaged primarily in financial intermediation plu interet income realized y all non-financial non-government reident intitutional unit, i.e. the ret of the private economy ; notice that capital gain on financial aet are not conidered here. Source: Power et al. (2004, p.6). Figure 3: The Interet-Dividend Ratio* a a Meaure of Shareholder Value France Germany United Kingdom United State Year *France, UK: Net interet payment/net dividend payment, corporation, Source: OECD National Account, Vol. II; US: Net interet payment/net dividend payment, dometic uinee, NIPA (BEA). A further tylied fact i the decline in peronal aving rate in recent decade (ee figure 4). After eing roughly contant, or lightly increaing, until the early 1980, they have noticealy fallen in France and in the UK during the 1980 efore tailiing during the 1990, only relatively modetly decreaed in Germany during the 1990, and dramatically dropped down in the US ince the 1982 receion for ecoming cloe to zero, or even negative, in the very recent pat. Figure 4: Houehold Saving Rate* a a Share of Dipoale Income 0.20 France Germany Year

7 Figure 4 (Cont d): Houehold Saving Rate* a a Share of Dipoale Income United Kingdom United State Year *Houehold Saving a a Share of Dipoale Income, Source: OECD Economic Outlook. Confronting thee tylied fact with the traditional Pot Keyneian model of growth and ditriution, one may rather naturally conclude that the high realied rate of profit of the Fordit era are to e explained y high rate of accumulation and that high expected rate of profit rought into exitence a virtuou circle of utained economic expanion. The period of crie i characteried y falling accumulation and profit rate, which i again conitent with aic theory. Marglin and Bhaduri (1990) have argued that the decline of the Golden Age wa partly due to a profit queeze faced y firm, that i, economie may have witched from tagnationim to exhilarationim and from wage-led growth to profit-led growth. Firt, the decline of the profit hare had a direct negative impact on the profit rate from the cot ide. Thi imultaneouly deteriorated firm expectation aout the future rate of profit and thu triggered a lowdown of accumulation, which in turn alo contriuted to the fall of the realied profit rate. The diverging development of accumulation and profitaility ince the early 1980, however, doe not allow uch neat theoretical interpretation. In the next ection, the traditional Pot Keyneian model are therefore extended y explicitly taking into account the impact of financialiation on accumulation and aving. 3. Introducing Financialiation into Pot Keyneian Model of Growth and Ditriution A Simple Kaleckian Macro Model Our model i et up a follow: 8 * * (1) r = ( Π / Y )( Y / Y )( Y / K ) = hu / v, r r (2) Π = Π + i K + i K = Π + INT + DIV, (3) INTK = i K / K, (4) DIVK = i K / K, (5) g = ( Π INT DIV + INT + DIV )/ K = r ( 1 ) INTK ( 1 ) DIVK, (6a) g i = α + γr θintk φdivk, α, γ > 0; θ > 0; φ > 0, 8 For a more complete account of the theoretical underpinning of the Kaleckian growth model, ee Lavoie (1995) and Hein (2006a, ).

8 (6) g i = α + βu + τh θintk φdivk, α, β, τ > 0; θ > 0; φ > 0, (7) g = g i. 7 = Definition (1) wa given aove. The profit hare can e een a exogenouly given y a contant mark-up applied to unit laour cot. 9 Equation (2) decompoe total profit into profit retained y firm, Π r, net interet payment, i K INT, and net dividend payment, i K = DIV. Definition (3) and (4) are introduced for computational convenience (and for facilitating econometric etimation) and ued in the aving and accumulation function, repectively given y equation (5) and (6). According to equation (5), an increae in interet and/or dividend payment (related to the capital tock) lead to a decreae in the aving rate: retained profit are aved y definition, while rentier conume at leat part of their income. It i aumed that there are no aving out of laour income. Two variant of the accumulation function are given in equation (6). The firt one can e een either a an extenion of the invetment function known from the Camridge model, or a the effective demand contraint in a Kaleckian model. In the latter cae, the rate of capacity utiliation i endogenouly determined following u = rv/h. In thi form, the model i, in fact, imilar to Lavoie (1995) Minky-Steindl model. With the invetment function given y equation (6), the model ecome an extenion of a linear Bhaduri-Marglin model, cloe to that developed y Hein (1999, 2004, 2006a). Thee previou model will e dicued in more detail elow. Here, it uffice to note that the crucial innovation of our model i the additional variale DIVK in the aving and invetment function. The motivation ehind pecifying two different invetment function i that they have different repective advantage in the context of econometric etimation and can alo e ued for routne check (ee ection 6). In the invetment function, INTK and DIVK oth reflect firm expenditure directed to rentier and therefore have a negative direct effect on accumulation. However, it i argued here that the two variale proxy rather different mechanim concerning the governance of firm. In particular, we expect φ > θ and argue that the increae in DIVK ha een a maor caue of the lowdown in accumulation in countrie experiencing financialiation during the pat decade. Our hypothei i grounded in an extenion of the Pot Keyneian theory of the firm in the context of financialiation, cloe to that developed y Stockhammer (2004, p.723 et eq.). The relevant unit of analyi i the large corporation operating in oligopolitic market and where ownerhip and control are eparated. It ha traditionally een argued that the management of uch firm are typically keen on achieving power and eteem via large market hare requiring high accumulation rate (ee, e.g., Galraith, 1969; Eichner, 1976; Lavoie, 1992). We argue that ondholder and ank (whoe influence in corporate governance i proxied y INTK in our model) are, in general, mainly concerned aout the long-term viaility of firm. They are therefore likely to paively accept or even favour a management trategy of retain and invet (Lazonick and O Sullivan, 2000). Quite converely, an increae in hareholder value (proxied y DIVK in our model) i een a favouring trategie of downize and ditriute ecaue hareholder are overwhelmingly intereted in (hort-term) financial return (ee iid.). The mean y which agency cot of outider equity (Jenen and Meckling, 1976) have een reduced in recent decade are well known and have een extenively analyed y the New Intitutional Economic (NIE) literature. In particular, management are nowaday diciplined y the threat of merger and the market for corporate con- 9 Formally, p = (1 + m)wl, where p = price, m = mark-up, w = unit wage and 1/l = laour productivity. Unit laour cot are aumed contant up to full capacity. Then, h = /py = 1 1/(1+ m).

9 8 trol (Manne, 1965), y a competitive market for manager (Fama, 1980), y tockprice oriented remuneration cheme, etc.. A recognied y Stockhammer (2004, p.725), it i today taken a a commonplace in the pulic deate that the enhanced control of management y hareholder ince the end of the Fordit era and the period of crie ha reduced accumulation and favoured profitaility, at leat at the firm level: Among the manifetation of thi lack of control over management were the puruit of market hare and growth at the expene of profitaility [ ] (OECD, 1998, p.17). Yet, a we have recalled in introduction, at the macroeconomic level a higher accumulation rate induce a higher profit rate, ceteri pariu. Clearly, the reakdown of the invetment-profit nexu i o intereting ecaue it eem to imply that the demand y hareholder for higher microeconomic profitaility at the expene of accumulation ha een realied even at the macroeconomic level. Tale 4 and 5 how that our model indeed contain the poiility of an intermediate cae a one potential explanation of the recent accumulation dynamic in ome countrie: financialiation imultaneouly depree the accumulation rate and increae the profit rate. Of coure, we are particularly intereted in the cae of riing DIVK, which will e mot relevant in our etimation for the US, ut alo to ome extent for France, during the period from 1980 onward (ee ection 2 and 6). The condition for the different accumulation regime are derived formally in Appendix 1. We conider i only cae featuring hort-run taility. Thi require that g / r < g / r and i g / u < g / u, repectively, and amount to auming that γ < 1 in tale 4 and β < h / v in tale 5. Alo, we aume INTK / DIVK = 0 and, in tale 5, INTK / h = DIVK / h = 0. We dicu thee aumption in ection 7. Curiouly, while empirically mot relevant, the intermediate cae ha received little attention in previou work. Tale 4: Effect of Interet and Dividend Payment in the Extended Minky- Steindl Model (Invetment Function Given y Equation (6a)) Normal Cae Intermediate Puzzling Cae Cae 1 < φ φ < 1 < φ / γ 1 > φ / γ r / DIVK + + g / DIVK + 1 < θ θ < 1 < θ / γ 1 >θ / γ r / INTK + + g / INTK + Tale 5: Effect of Interet and Dividend Payment in the Extended Hein Model (Invetment Function Given y Equation (6)) Normal Cae Intermediate Puzzling Cae Cae 1 < φ φ < 1 < φh / βv 1 > φ h/ βv u / DIVK + + r / DIVK + + g / DIVK + 1 < θ φ < 1 < φh / βv 1 > φ h/ βv u / INTK + + r / INTK + + g / INTK +

10 Comparion with Other Theoretical Analye of Financialiation 9 A indicated earlier, the model propoed y Lavoie (1995) and Hein (2006a) are not o much model of financialiation, ut rather monetary extenion of traditional, real Kaleckian growth model. 10 Thi may alo explain why they focu on a comparion etween the normal cae and the puzzling cae with repect to change in interet rate (and not o much on the equivalent of our intermediate cae ). In fact, one of the merit of thee model i the demontration that a poitive relationhip etween the interet rate and the profit rate, a potulated y ome neo-ricardian author, 11 can alo e derived within a Kaleckian framework. Another intereting apect of thee model i that the leverage ratio, l = K /K, will e tale only in the puzzling cae, ut untale in the two other cae (a in Steindl paradox of enforced indetedne ). Here, entrepreneur react to an increae in the interet rate y cutting down invetment. Thi can e een a an attempt to compenate for the increae in the leverage (gearing) ratio aociated with a higher interet rate. However, thi attempt will e unucceful due to the macroeconomic force underlying the normal cae: internal accumulation i reduced proportionately more than outide aving, o that the gearing ratio increae (Steindl, 1976, p.118). Converely, the puzzling cae feature a poitive relationhip etween the interet rate and the equilirium accumulation rate. Here, the direct negative effect of the interet rate on invetment i weak and, imultaneouly, the propenity to conume out of interet income i utantial. Thu, the reditriution of income from firm (which do not conume) to rentier will conideraly increae conumption and thu have a trong indirect effect on invetment via it impact on the profit rate (in the Minky-Steindl model ) or on capacity utiliation (in Hein model). It can e hown algeraically that only under uch condition will the leverage ratio tailie at a non-negative, finite level, following a change in the interet rate. The preent paper i not o much intereted in the long run ehaviour of the model, ut rather in undertanding the empirical, medium run trend of growth and ditriution in the recent pat. The intuition ehind the intermediate cae i that, although conumption out of capital income i high, the direct negative effect of dividend payment overwhelm the equilirium rate of accumulation. At the ame time, however, hareholder conumption i high enough for increae in the dividend/capital ratio to drive up the profit rate. Our account of financialiation i alternative to the idea of a patrimonial accumulation regime (Aglietta, 1998, 2000) or a finance-led growth regime (Boyer, 2000). In thee model, a poitive relationhip etween hareholder value orientation and economic activity i poile via the timulating effect of (tock market) wealth on conumption. 12 In a imilar vein, Stockhammer (2005-6) conider wealth-aed conumption within a Kaleckian model. He alo identifie the decline of the ratio of invetment to profit a a new macroeconomic tylied fact. However, hi algeraic explanation of the invetment-profit puzzle appear to e omewhat unatifactory, a it eem to effectively imply that the growth-profit trade-off, which i potulated at the microeconomic level, alo exit at the macroeconomic level (for a dicuion, ee Appendix 2). In the preent paper, it i argued that conumption out of dividend income (rather than wealth) contitute a potentially more relevant explanation of either the puzzling 10 Hein extend Lavoie analyi y conidering the poiility of an interet-elatic mark-up and experiment with different accumulation function: one (Hein, 2006) produce tagnationit reult, the other (Hein, 2006a) i aed on the Bhaduri-Marglin model. 11 See Sraffa (1960), and, more recently, Panico (1985, 1988) and Pivetti (1985, 1991). 12 For (critical) dicuion of Aglietta and Boyer interpretation of financialiation, ee, e.g., Plihon (2002), Colleti (2004), Hoang-Ngoc and Tinel (2003), Cordonnier (2003).

11 10 cae (which i imilar to Boyer (2000) finance-led growth regime ), or, more importantly, the intermediate cae (which i an alternative olution to Stockhammer invetment-profit puzzle ). A imilar argument i developed in the innovative work y Van de Velde (2005) and Cordonnier (2003). It i certainly an analytical weakne of our model that tock market price and wealth effect are not explicitly conidered. In effect, the trategy downize and ditriute may alo take the form of hare uyack y corporation, therey aiming at capital gain for hareholder. However, it i important to recognie that, empirically, dividend and capital gain alway enefit the ame individual (hareholder), o that in our imple framework an increae in the propenity to conume out of wealth hould e reflected in a higher propenity to conume out of dividend, ceteri pariu. 4. ARDL-Baed Etimation of Pot Keyneian Invetment Function: Advantage and Prolem Etimating invetment function i not an eay tak. In effect, ome fundamentalit Pot Keyneian argue that in an uncertain, or nonergodic, world, invetment deciion are overwhelmingly determined y exogenou animal pirit of entrepreneur and can therefore not e expected to follow a tale functional expreion (ee, e.g., Davidon, 2000, p.15). In a more optimitic tance, Kalecki noted at the end of hi life that there i a continuou earch for new olution in the theory of invetment deciion (Kalecki, 1971, p.viii). From an empirical perpective, Kalecki wa very much concerned with the lag involved etween caue and effect (Areti, 1992, p.130). Of coure, Kalecki did not have very ophiticated econometric technique at hi dipoal and therefore, for the purpoe of analyi, (he) incorporated an average lag etween deciion and implementation. Clearly, a more empirical-aed approach would need to take account of different lag in different circumtance (Sawyer, 1985, p.53). A recent innovation in time erie econometric, that appear to preciely fulfil thi requirement, i the ARDL-aed analyi of (long-run) level relationhip advanced y Pearan et al. (2001, herafter PSS). Thi approach preent important advantage over imple partial adutment model (PAM) or the traditional cointegration approach developed y Engle and Granger (1987) and Johanen (1988, 1991, 1995). Below, the ARDL-aed approach i dicued in the context of and applied to different Pot Keyneian invetment function. We etimate the following unretricted error correction model (ECM): r r (8) g = α + ρg + λ r + ϕ g + ψ r + ε, t p t 1 t 1 i t i t t i= 1 = 0 u h u h (9) gt = α + ρgt 1 + λ ut 1 + λ ht 1 + ϕi gt i + ( ψ ut + ψ ht ) + ε t, r INTK DIVK (10) gt = α + ρgt 1 + λ rt 1 + λ INTKt 1 + λ DIVKt 1 p q + i gt i + i= 1 = 0 p i= 1 q q = 0 r INTK DIVK ( ψ r + ψ INTK + ψ DIVK ) ε, ϕ + t u h INTK DIVK (11) gt = α + ρgt 1 + λ ut 1 + λ ht 1 + λ INTKt 1 + λ DIVKt 1 p q + i gt i + i= 1 = 0 t u h INTK DIVK ( ψ u + ψ h + ψ INTK + ψ DIVK ) ε. ϕ + t t t t t t t

12 11 Equation (8) and (9) are aed on linear verion of the traditional invetment function underlying the Camridge model and the Bhaduri-Marglin model, repectively, and can e conidered a enchmark regreion. Our hypothei i that in countrie recently experiencing financialiation, a long-run relationhip etween the profit rate and the accumulation rate can e found for the time efore, ut not after the early From equation (9), it may alo e poile to gain ome inight into whether economie have een wage-led, or profit-led in different period. Etimation of equation (10) and (11) hould provide the ai for a direct tet of our hypotheied intermediate cae. Unfortunately, appropriate data for INTK and DIVK were found only for the US and for France. However, thi matche well with the impreion gained from our review of the tylied fact, according to which financialiation ha een particularly pronounced in thee two countrie. Our etimation trategy i a follow: firt, unretricted ECM are etimated, tarting with p = q = 2 efore equentially dropping regreor with inignificant coefficient. That i, the hort-run dynamic of the model are automatically determined following tatitical ignificance. Thi acknowledge the complexity of invetment ehaviour and it likely variaility over time and acro countrie. Second, we are particularly intereted in potential long-run level relationhip etween the dependent and the explanatory variale. The eminal contriution y PSS ha een to derive the aymptotic ditriution of a tet tatitic (F PSS -tatitic) which i non-tandard under the null irrepective of whether the underlying regreor are I(0), I(1), or mutually cointegrated. A i well known, the traditional cointegration approach require that all variale are homogeneouly I(1) and that regreor are not mutually cointegrated. However, it i a theoretically a well a empirically controverial quetion a to whether the accumulation rate, for example, i I(0) or I(1) 13 or whether profit and dividend are cointegrated 14, o that the flexiility of the approach y PSS i of invaluale utility for our matter. A an illutration, the null hypothei of no long-run relationhip etween g, r, INTK r INTK DIVK and DIVK in equation (10) i ρ = λ = λ = λ = 0. The FPSS-tet i aed on a pragmatic ound-teting approach, for the purpoe of which PSS have taulated two et of critical value, one auming that all the regreor contain a unit root, the other auming that they are all tationary. Whenever the F-tatitic fall outide the critical value ound, valid inference can e made without making aumption aout the order of integration of the underlying variale. PSS have alo taulated upper and lower ound critical value for a t-tet, the null hypothei of which i ρ = 0 (t BDM -tet). 15 If the null i reected, etimator of the long-run coefficient can e otained a ˆ ˆr L λ ˆ r = / ρ, ˆ ˆu L λ ˆ u = / ρ, ˆ ˆh L λ ˆ h = / ρ, ˆ ˆINTK L λ ˆ INTK = / ρ, and ˆ ˆDIVK L λ ˆ DIVK = / ρ from the OLS etimate from equation (8) (11), repectively. PSS have hown that the etimated long-run coefficient are T conitent (uper-conitent) and follow the limiting normal ditriution, while all the hort-run parameter are T conitent and have the tandard normal ditriution. On the ai of our etimate for the long-run coefficient, we will e ale to make concluion aout poile accumulation regime in term of tale 4 and 5 for plauile propenitie to ave out of capital income. Exact definition of the data ued are reported in Appendix 4, ut ome remark hould e made here. Notice firt that variale are in current price. Thi meaure alo 13 Nelon and Ploer (1982) have famouly argued that mot economic time erie contain a unit root. 14 Cointegration in thi cae may take a non-trivial form; in particular, it may e only temporary and/or non-linear. See Kapetanio et al. (2006) for a related application within a mooth-tranition autoregreive (STAR) ECM. 15 Baneree et al. (1998) have derived the non-tandard ditriution for thi tet, aed on the aumption of homogenou I(1) regreor.

13 12 underlie Stockhammer (2005-6) formulation of the invetment-profit puzzle and i ued in previou econometric work, e.g. Stockhammer (2004). It i utified y our focu on the determination of (current) profit y (current) capitalit expenditure, while it may produce a omewhat too negative picture of the lowdown of accumulation in the pat decade from a mere productive capacity point of view (inflation ha een relatively low and relative price of invetment good may have decreaed). We ue yearly oervation. A no uniform and reliale meaure of capacity utiliation i availale at the international level, GDP growth i taken a a proxy. Although certainly not a perfect olution, thi i common practice in invetment tudie. The variale INTK and DIVK could e contructed for the total uine ector for the US, ut for France data were availale only for non-financial corporation. An oviou technical prolem that typically affect invetment function etimation i the relatively mall numer and low frequency of availale oervation. Thi goe omewhat againt the pirit of general-to-pecific modelling and the aymptotic tet for long-run relationhip. Unfortunately, thi prolem i difficult to overcome and intrinic to the notion of accumulation regime aociated with hitorically ditinct, relatively hort, era. In our etimation, thee era are determined y applying the traditional Chow tet to everal potential reakpoint and then chooing that with the highet tet tatitic. Another potential criticim againt the ARDL-aed approach i that cro-country comparion are complicated if different lag tructure are ued for different countrie, inofar a regreion reult may e enitive to change in the lag tructure. On the other hand, it can e argued that it i preciely the flexiility of general-to-pecific modelling that make the ARDL-aed approach fit particularly well into the epitemological principle advocated y many Pot Keyneian. In effect, the ARDL methodology i grounded in the LSE approach (ee, e.g., Hendry, 2000), which Gerrard (2002) call a radical methodology that hould e appreciated y Pot Keyneian and other ceptic of conervative, theory-driven, approache to econometric technique (Gerrard, 2002, p.119). In particular, the LSE approach [ ] i founded on the preuppoition that the nature of the DGP (data generating proce, TvT) i not known a priori ut ha to e dicovered during the modelling proce (iid., p.129). Furthermore, general-topecific modelling implie extenive diagnotic teting, focuing in particular on erial correlation prolem. In fact, the LSE approach interpret erial correlation a indicative of a pecification prolem, requiring that the model e repecified. By contrat, the conervative approach often conit imply in aduting OLS reidual for erial correlation via iterative method (e.g. Cochrane/Orcutt procedure) or on the ai of theory-led aumption aout the autocorrelation tructure (ee iid., p.127). 5. Previou Empirical Analye of Invetment and Financialiation In fact, the preent paper appear to e the firt attempt to analye accumulation regime econometrically within a Kaleckian model and in the context of financialiation, a defined aove. A widely quoted empirical work on invetment equation i Bowle and Boyer (1995). The author etimate a linear verion of the tagnationit variant of the Kaleckian invetment function containing no financial variale. Without dicuing the order of integration of the underlying variale, they etimate a PAM. They include a time trend in their etimation, the meaning of which i difficult to interpret, and encounter prolem of autocorrelation. Their period of etimation i , and no u-ample analyi i conducted. Clearly, thi doe not match with our periodiation propoed in ection 2. Bhakar and Glyn (1995) etimate a PAM of a linear variant of the Bhaduri-Marglin invetment function, while adding an additional regreor meauring the cot of capital.

14 13 The etimation period i The order of integration of the variale i not dicued, ut a tet for cointegration i performed. A Stockhammer (2004) note, teting for cointegration in a partial adutment model i meaningle [.] ince an I(1) variale y definition i [ ] cointegrated with it lagged value. Ford and Poret (1991) etimate invetment function aed on neoclaical principle in a tudy for the OECD. They alo encounter the notoriou prolem of the low power of unit root tet, o that the order of integration of the capital tock cannot e acertained with confidence (p.95). The author experiment with different pecification, ut can only hope that regreion on (the variale ) firt difference, a long a they are tationary, may yield conitent etimate (p.95). In an innovative tudy, Hein and Ochen (2003) etimate a linear verion of an extended Bhaduri-Marglin invetment function imilar to that preented in ection 3 aove. Intead of our variale INTK and DIVK, the author include the real long-term interet rate a an additional regreor. They alo include a time trend a well a an AR(1) adutment term, containing the firt lag of the OLS reidual. It wa argued aove that the LSE methodology may e etter uited for treating autocorrelation when etimating invetment function. Hein and Ochen alo etimate a peronal aving function. It i acknowledged y the author that the etimated propenitie to ave out of rentier income are poily overetimated ecaue their proxy of rentier income (capital tock multiplied with long term real interet rate) may e downward iaed. Another prolem faced y Hein and Ochen (2003) i that many of their etimation yield untale equiliria. The taility condition of their model i β < h / v (a in our extended Bhaduri-Marglin model from ection 3 aove). The prolem of intaility may e due to the ue of output growth a a proxy for capacity utiliation (on which β i the coefficient) a well a to the difficulty of accurately etimating the capital/full capacity coefficient, v, which Hein and Ochen proxy y the ratio of nominal gro capital tock to nominal GDP. It can e een from tale 5 aove that if β > h / v, the condition for the different accumulation regime ecome eentially nonenical. Clearly, our verion of the model containing equation (6a) a the invetment function i not affected y thee prolem. Leaving thee difficultie aide, the following reult derived y Hein and Ochen (2003) are worth noting a a enchmark for our own analyi of financialiation in the US and in France ince the early 1980: the equivalent of the puzzling cae, a defined in tale 5, wa prevalent in the US during , while during an increae in the interet rate led to an increae in capacity utiliation and the profit rate, ut had no effect on the accumulation rate. For France, the puzzling cae i derived for the period , while interet rate had no effect at all on the endogenou variale in the period Clearly, we would expect the effect of our variale DIVK to e rather different for oth countrie, in particular during the time ince the early Hein and Ochen (2003) dicu whether their omewhat urpriing reult are due to the aumption of an interet-inelatic profit hare. In effect, it may well e the cae that firm ucceed to raie their mark-up when interet rate (or the dividend payout ratio) increae. Thi hypothei, however, i difficult to tet econometrically o that in our etimation, we alo have to aume DIVK / h = INTK / h = 0. Another, ophiticated, tudy i Stockhammer (2004). An invetment function inpired y the Bhaduri-Marglin model ut extended y financial variale i etimated. Many different pecification are ued in an attempt to check the routne of etimation reult. Serial correlation prolem are taken very eriouly and alleviated y the incluion of the firt two lag of the dependent variale a regreor. The price paid for thi, however, i that many regreion are to a large extent dominated y the autoregreive term, with coefficient on the explanatory variale eing often little ignificant. Stockhammer acknowledge the difficulty of acertaining the order of integration of the variale underlying hi etimation and agree on the uefulne of the ARDL

15 14 approach, quoting from Hamilton (1994, p.562) eminal textook: (they) olve many of the prolem aociated with puriou regreion, although tet of ome hypothee will till involve non-tandard ditriution. However, Stockhammer doe not explore the quetion of non-tandard hypothei teting further when reporting the etimation reult from hi ARDL model. Stockhammer (2004) proxie financialiation y a variale RSNF ( interet and dividend income/value added (of non-financial uinee)) and include thi variale in a regreion of the accumulation rate on meaure of capacity utiliation, the profit hare and the cot of capital 16. He find trong upport for (the) hypothei (that financialiation caued a lowdown in accumulation) in the USA and France, ome upport in the UK, ut none in Germany (p.739). Thi matche well with our own conecture, a ection 2 aove ugget that financialiation ha een particularly pronounced in the US and in France. In one pecification, Stockhammer (2004) include the additional variale RPNF ( interet and dividend payment/value added ), noting that, if the ignificance of RSNF were due to it correlation with payment, we hould expect payment to have a negative ign and RSNF to witch to a poitive ign (p.735). However, while thi doe not happen, oth variale ecome inignificant, which may e due to the high degree of correlation etween them. In our model, the variale included are net interet payment and net dividend payment (each related to the capital tock rather than to value added). It i expected that thi increae the chance for ignificant coefficient and that the negative effect of net dividend payment i o large a to overcompenate the poitive effect of the profit rate in firm accumulation deciion. Stockhammer (2004) doe not attempt to interpret hi reult in the framework of a macro model o that he can make no concluion aout the divergence etween macroeconomic accumulation and profit rate. Duménil and Lévy (2003) and Cordonnier (2003) provide careful and original analye of the accumulation dynamic in the US and in France over the pat decade. However, they do not refer to any econometric evidence. 6. Regreion Reult What Happened to the Invetment-Profit Nexu? Firt Leon from the Traditional Kaleckian Model Tale 6 report the etimation reult for equation (8). 17 Starting with France and Germany, we ee that neither the t BDM -tet nor the F PSS -tet are ale to reect the null of no long-run relationhip etween the accumulation rate and the profit rate for , a expected. In the cae of the UK, where accumulation ha not lowed down during thi period, the long-run coefficient on the profit rate i ignificant at the 10 per cent level, although thi reult i hardly meaningful, given the value of the t BDM - and the F PSS -tet tatitic. For the US, equation (8) could e etimated over a longer period. Interetingly, the long-run coefficient on the profit rate i highly ignificant for the period , while it i inignificant for Somewhat urpriingly, the period alo feature a poitive long-run relationhip etween accumulation and profit rate. However, the long-run coefficient on the profit rate i only very weakly ignificant and it i poile that the etimation reult are dominated y the New Economy Boom of the late Indeed, when a time dummy i included for the hort period , the invetment-profit nexu reak down, with the time dummy eing highly ignificant and accounting for a temporary increae in accumulation of roughly 1.3 per cent. 16 The effect of the cot of capital are almot alway inignificant and weak. 17 All etimation are performed with Microfit 4.1.

16 15 Tale 6: Regreion Reult for Equation (8) France Germany United United State Kingdom Period Contant (-0.28) (0.84) (-0.54) (-1.18) (0.81) (-1.36) (0.77) D (3.19) g t (-1.85) (-1.75) (-1.86) (-2.17) (-2.98) (-3.63) (-5.44) r t (0.96) (-0.68) (2.41) (2.17) (2.69) (2.32) (0.20) g t (2.52) 0.40 (1.95) 0.45 (2.51) 0.68 (5.22) 0.50 (2.96) 0.52 (4.06) 0.56 (5.27) r t (2.73) 0.16 (1.28) 0.71 (5.11) 0.43 (2.03) 1.05 (5.84) 0.89 (5.74) r t (2.28) r t (-3.13) L r 0.34 (0.71) (0.79) 0.39 * (1.77) 0.71 (1.44) 0.31 *** (3.49) 0.68 * (1.79) (0.20) L D *** (3.62) t BDM * ** *** F PSS * *** *** R R χ² Chow 16.3[.01] 28.8[.00] χ² SC 1.68[.20] 0.20[.65] 14.78[.25] 2.33[.13] 0.06[.81] 0.01[.93] 0.71[.40] Note: Figure in parenthee are t-value, figure in racket are p-value. For the critical value of the t BDM -tet and the F PSS -tet, ee PSS, tale CI(iii) and CII(iii), repectively, for k = 1. Significance at the 10%, 5%, and 1% level i denoted y *, **, and ***, repectively. Equation (9) could e etimated over longer period for mot countrie (ee tale 7). In France, a long-run relationhip etween accumulation rate, output growth, and profit hare i detected for the whole period 18 and the u-period , ut it reak down in the lat u-period. Thi i conitent with the reult otained from equation (8). Notice alo that the coefficient on the profit hare i inignificant (and furthermore of the wrong ign) in all period o that profit-led growth doe not eem likely. A for the US, a trong accelerator effect i indicated for all period. The coefficient on the profit hare i inignificant and ha the wrong ign for the period and , o that profit queeze doe not appear a a maor caue of the lowdown of accumulation in thee period. However, the large poitive coefficient on the profit hare for the period i omewhat urpriing, even if it i only marginally ignificant. Again, the reult may e dominated y the invetment oom of the late 1990, although experimentation with a time dummy did not yield utantially different reult. 18 In thi regreion, the long-run coefficient appear unrealitically high in aolute value. Without the time trend, thi prolem i corroorated, while ign and ignificance of the coefficient remain unaffected.

17 16 Tale 7: Regreion Reult for Equation (9) (-2.51) 0.25 (2.82) (0.09) 0.26 (3.86) 0.31 (2.45) 0.83* (1.60) (-0.26) 0.12 (4.25) 0.61 *** (4.26) * (1.15) (-5.59) 0.12 (1.73) 0.14 (2.59) 0.39 (2.24) 0.13 (3.50) 0.32 * (1.58) 0.37 *** (3.85) France Period Contant (1.19) (1.42) Lin. Trend (-3.20) g t (-3.20) (-1.95) u t (4.97) (2.65) h t (-1.37) (-0.99) g t (-3.52) 0.45 (1.68) u t 0.32 (3.38) 0.52 (2.24) u t (5.29) h t (-2.07) h t (1.95) L u 2.82 *** 1.49 * (3.84) (1.49) L h (-1.32) (-0.75) (-0.005) (0.18) (-2.74) (-4.89) 0.22 (6.44) (-0.99) Germany (-2.44) (4.44) (-4.92) 0.40 (5.14) (-4.52) (-1.56) 0.12 (2.78) (-2.73) (-2.73) (-2.73) 0.62 *** (6.26) *** (-8.62) t BDM * *** *** *** F PSS *** 4.41 * *** 7.30 *** *** R R χ² Chow 11.6[.11] 5.52[.13] 13.3[.04] 29.5[.00] χ² SC 0.74[.39] 0.11[.74] 0.09[.76] 0.02[.88] 3.91[.05] 3.16[.08] A a preliminary concluion, it emerge that the reakdown of the invetment-profit nexu in the period from the early 1980 onward ha een particularly clear in France, while thi appear le oviou for the US. Here, incluion of a time dummy in equation (8) alo ugget that accumulation evolved independently of profit during thi period, ut thi hypothei cannot e utantiated from etimation of equation (9). For oth countrie, it will e intereting to enquire into the impact of financial variale, a enviaged in equation (10) and (11). The accumulation dynamic in Germany and the UK are omewhat different, a the profit hare exhiit a poitive effect on accumulation, at leat in ome period. Furthermore, a there ha een no lowdown of accumulation in the UK while Germany ha witneed only a relatively weak degree of financialiation, etimation of equation (10) and (11) doe not eem a promiing a for the two other countrie. Note, however, that in the UK, the profit hare eem to e poitively related to accumulation in , while in Germany thi relationhip exit during , ut reak down in the early 1980, a expected.

18 17 Tale 7 (cont d): Regreion Reult for Equation (9) United Kingdom United State Period Contant (-1.77) 0.46 (1.73) (1.53) (-3.39) Lin. Trend (0.50) g t (-3.44) (-4.75) (-2.18) (-3.07) u t (1.03) 0.24 (5.92) 0.31 (4.02) 0.11 (2.60) h t (3.13) (-1.47) (-1.31) 0.24 (3.48) g t (1.12) (4.24) 0.51 (2.17) 0.18 (3.48) u t 0.23 (8.19) 0.26 (5.25) 0.18 (8.02) u t (5.74) u t (-3.57) (-2.02) h t (-1.57) L u 0.18 (0.95) 0.77 *** (3.65) 0.95 (1.68) 0.62 ** (2.55) L h 0.37 * (1.80) (-1.42) (-0.91) 1.30 * (1.94) t BDM ** *** *** * F PSS 8.70 *** *** *** *** R R χ² Chow 16.32[.04] 26.7[.00] χ² SC 0.59[.44] 1.00[.32] 1.33[.25] 0.47[.49] Note: Figure in parenthei are t-value, figure in racket are p-value. For the critical value of the t BDM -tet and the F PSS -tet, ee PSS, tale CI(iii), CI(iv), CII(iii) and CII(v), repectively, for k = 1. Significance at the 10%, 5%, and 1% level i denoted y *, **, and ***, repectively. It i not attempted to peculate over whether particularly economie have een profit-led or wage-led in particular period of time. In effect, Appendix 3 how that our etimate are affected y the prolem of potentially untale equiliria, encountered alo y Hein and Ochen (2003). I our Intermediate Cae Realitic? Evidence for the US and Firt Sign for France In thi uection, particularly focu i on the US economy, where financialiation ha led to a numer of remarkale change over the pat decade. Figure 5 how that dividend have replaced interet a the maor part of firm expenditure directed toward rentier in the early 1990.

19 18 Figure 5: Net Interet and Dividend Payment Related to the Capital Stock, USA* 0.05 interet/capital ratio dividend/capital ratio Year *Net private interet (dividend) payment/fixed aet of nonreidential uinee, Source: NIPA tale (BEA). Figure 6: Accumulation and Retained Profit, Private Corporation, USA* 0.06 accumulation rate rate of retained profit Year *Net capital formation/fixed aet (left cale) and profit after tax + net interet and dividend payment/net operating urplu, Source: NIPA tale (BEA). Figure 7: Interet and Dividend Income a a Share of Houehold Income, USA* 0.13 hare of interet income hare of dividend income Year *Net interet (dividend) payment y uinee and government/net interet and dividend payment y uinee and government + compenation of employee, Source: NIPA (BEA). Figure 8: Rentier Income Share and Houehold Saving Rate, USA* 0.16 aving rate interet and dividend income a a hare of houehold income Year *Net interet + net dividend income/houehold income (defined a in figure 7) and houehold net aving a a hare of houehold dipoale income, Source: NIPA (BEA).

20 19 Figure 6 i particularly intereting ecaue it give direct upport to the Kaleckian argument according to which retained profit are the maor ource of accumulation, with a notale exception eing the invetment oom in the late Notice that private corporation have ditriuted almot 100 per cent (!) of profit to rentier in recent year. Tale 8: Regreion Reult for Equation (10) France USA Period Contant 0.04 (2.67) 0.03 (2.11) (2.18) 0.02 (2.89) (0.97) Lin. Trend (-3.63) D (2.32) g t (-2.91) (-4.63) (-4.52) (-5.09) (-5.85) r t (-0.64) 0.18 (3.19) 0.18 (2.56) 0.20 (3.10) 0.50 (3.01) INTK t (-2.92) (-4.19) (-3.97) (-4.70) (-2.72) DIVK t (-3.20) 0.62 (0.87) (-2.70) (-3.70) (-2.49) g t 0.41 (3.92) 0.40 (4.10) 0.23 (1.67) r t (4.93) 0.54 (4.72) 0.70 (6.02) INTK t 0.67 (2.76) 0.46 (1.87) 0.92 (4.96) INTK t (4.96) DIVK t (-1.93) 0.14 (0.29) (1.95) (-1.02) (-3.54) DIVK t (-3.22) L r 0.46 ** (2.31) 0.35 *** (3.08) 0.33 *** (3.14) 0.36 *** (3.82) 0.60 *** (3.39) L INTK *** (-2.84) *** (-4.33) *** (-3.07) *** (-3.61) ** (-2.86) L DIVK *** (-4.11) 1.17 (0.84) *** (-3.19) *** (-4.06) ** (-2.81) L D 0.01 ** (2.22) t BDM ** *** ** *** *** F PSS *** 9.70 *** *** *** R R χ² Chow 11.5 [.24] χ² SC 0.00[.98] 2.25[.13] 0.11[.74] 0.03[.87] 0.12[.91] Note: Figure in parenthei are t-value, figure in racket are p-value. For the critical value of the t BDM -tet and the F PSS -tet, ee PSS, tale CI(iii), CI(iv), CII(iii) and CII(v), repectively, for k = 3. Significance at the 10%, 5%, and 1% level i denoted y *, **, and ***, repectively.