Wealth Inequality, The Rate of Return on Property Ownership and Pareto Coefficients

Current research on wealth inequality attributes the main reason for the long-run divergence in wealth inequality to the r-g gap, where r is the are of return on capital and g is the economy's growth rate. Nonetheless, speculations about capital and the rate of return on capital - it's definition and measurement - have raised concerns about deriving the r-g gap. This paper addresses the concentration of wealth by investigating income from property ownership. Specifically, it focuses on 3 main issues: (i) I provide an alternative measure for the Piketty r-g gap by deriving the rate of return on property ownership (rp), and show that the gap between the rate of return on property ownership (rp) and the long-run growth in the economy (g) explains the fast rise in wealth inequality; (II) I show that when traditional models, that focus on production only, are used to capture the natural behavior or wealth inequality, wealth inequality tends to be inconclusive or explosive over the long-run; and (iii) I implement the new measure of rp - g into a simple model of wealth accumulation, that takes into account both productive and non-productive property in generating wealth. Using the United States as a case study, I find that wealth inequality is more concentrated than suggested in the literature.

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Regime Switching Pro-cyclical Government Spending in Developing Countries: An example using South Africa

(with John N. Francois and Andrew Keinsley)

We estimate a Markov switching endogenous government spending rule for South Africa to show the existence of regime dependent cyclicality of fiscal policy in developing countries. Estimation results reveal that government spending switches between high and low pro-ccyclical spending regimes. We impose the estimated policy rule on a simple NeoClassical model to demonstrate how the presence of a regime switching rule impacts the efficacy of government spending shocks. We find that pro-cyclical regime shifts in the government spending rule has both a qualitative and a quantitative impact on the spending multiplier.

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Intra-Africa Foreign Direct Investment (FDI): A Comprehensive Analysis

(with Elizabeth Asiedu and Neepa Gaekwad-Babulal)

There is an extensive empirical literature on how the quality of institutions (QI) and the attractiveness of economics conditions (EC) in host countries affect the amount of foreign direct investment (FDI) the country recieves. The consensus is that good EC and QI facilitate FDI flows. However, these studies do not take inot account the cost associated with setting up and operating a business (COB). This paper reassesses the link between QI, EC and FDI. Specifically, it analyzes whether QI and EC have a significant impact on FDI after controlling for COB. The analysis are based on a linear regression with panel corrected standard errors (PCSE) and it utilizes panel data from South Africa (source country) to 38 African Countries (host countries) over the period 2003 - 2016. There are three main findings: (i) The attractiveness of the measures of the host country’s market (GDP, GPD per capita, quality and quantity of labor force) have a positive and significant impact on FDI; (ii) The quallity of institutions (rule of law, voice and accountability, corruption, political instability) have a significant impact on FDI after controlling for market attractiveness; (iii) The cost of operating a business (minimum capital requirement, access to credit, taxes) have a significant impact on FDI after controlling for market attractiveness and institutional quality. The measure of institutional quality turn insignificant after controlling for the cost of operating a busines. The results clearly suggest that the cost of operating a business outweighs institutional quality. This has several policy implications for African economies: Institutions evolve slowly and takes time to improve. Furthermore, the ability of policy makers to alter institutions is quite limited. In contrast, business regulations are solely determined by the government and can be changed quickly. Thus, this makes a case for African countries to improve their business regulatory environment.

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Modeling Sub-Sahara African Economies Using a Dynamic Stochastic General Equilibrium (DSGE) Model: The Role of Institutions

(Work in Progress)

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