Daehwan Kim (Advanced Academia Fellow, Feb – Jul ’23) willtalk about his research at CAS:

Cross-Country Differences in Wealth-Income Ratios

on 30 March 2023 (Thursday) at 16:30 h.

Moderated by Roumen Avramov.

Abstract:

The goal of my project is to understand cross-country differences in the wealth-income ratio, a ratio of national wealth to GDP. Understanding the wealth-income ratio is important for three reasons: First, it is an indicator of the unequal distribution of wealth within a country and is highly relevant to the ongoing academic and policy discussion of inequality. Second, it is an indicator of the existence of a financial market bubble, an intensely debated topic in recent years given the rapidly rising asset prices in many advanced and developing economies. Third, it is closely related to the share of labor income, an important dimension of how national income is distributed across different actors. I aim to improve the existing analysis of the wealth-income ratio and to present a more satisfactory explanation of, among other things, the role of policies and institution, the role of monetary policy and credit regulation, and agency cost of credit.
In the first part of the analysis, I present a Gordon-growth-model-based formula for wealth-income ratios. The Gordon formula shows negative (positive) correlation between wealth-income ratios and saving (growth) rates, contrary to conventional understanding of the relationship. The Gordon formula also shows the important role of labor share in determination of wealth-income ratios. I quantify contribution of labor share and other components to cross-country variation in wealth-income ratios.
In the second part of the analysis, I document positive cross-country correlation between the amount of credit scaled by GDP and the wealth-income ratio and explore its implications. Credit is a part of lenders’ wealth but is not a part of national wealth. Thus, the correlation is not trivial, and its explanation requires a careful analysis of the relationship among credit, income, and wealth. Theories of credit suggest correlation among credit, income and wealth under the presence of agency cost (Kiyotaki and Moore, 1997; Gelain, Lansing, and Natvik, 2018), asymmetric information (Bernanke, Gertler, and Gilchrist, 1999), and the regulation of the lending standard (Greenwald, 2018; Greenwald and Guren, 2021). I analyze a simple model, a variant of Iacoviello’s (2005), where firms face borrowing constraint and relaxing this constraint (either by regulators or by structural reform) leads to higher real output, asset price, and wealth-income ratios. In this model, wealth grows more than output, not because the stock of assets grows more than output, but because the price of asset rises more than the price of output. The price of assets rises because households and firms increase the demand for assets to achieve greater consumption and production. If the supply of assets is inelastic, the price of asset rises more. My goal is to empirically verify the logic outlined above from a cross-country data set of credit, income, and wealth. Specifically, I aim to verify that credit amount is associated with lending standard such as LTV and DTI and with an indicator of agency cost. My analysis supplements the existing studies of the wealth-income ratio that emphasizes the role of asset price (Fuller, Johnston, and Regan, 2020); it also supplements the studies linking credit growth to asset price booms (Jorda, Schularick, and Taylor, 2015).