Abstract
Since Piketty offered a new view of capital/income ratio, numerous attempts have been made to examine the relationship between return on capital, economic growth and the capital/income ratio. This paper attempts to shed new light on this field. More precisely, following recent literatures that pay attention to dynamics of external balance sheets of countries, we examine if Piketty’s results for large countries are robust for a country that takes the world rate of return on capital as given and whose savings rate increases gradually from negative value. It is revealed that for such a country, (1) Kuznets curve is drawn and (2) capital/income ratio decreases in accordance with a rise in savings rate and return on capital.
Highlights
Researches on national accounting system have entered a new phase since Piketty and his coauthors offered a sweeping new view of capital/income ratio, that is, the capital/income ratio increases if rate of return on capital (r) is greater than economic growth rate (g) (Atkinson, Piketty and Saez (2011) [1], Alvaredo, Atkinson, Piketty and Saez (2013) [2], Piketty (2011, 2014, 2015) [3]-[5], Piketty and Saez (2003, 2014) [6] [7], Piketty and Zucman (2014) [8] etc.)
We investigate if Piketty’s results for large countries are robust for a country that takes the world rate of return on capital as given and whose savings rate increases gradually from negative value
The main findings of this extended Piketty’s model are: for such a country, (1) Kuznets curve is drawn and (2) capital/income ratio decreases in accordance with a rise in the savings rate and the return on capital, all of which are in sharp contrast to Piketty’s results for large countries, the framework of this paper is basically the same as that of Piketty’s
Summary
Researches on national accounting system have entered a new phase since Piketty and his coauthors offered a sweeping new view of capital/income ratio, that is, the capital/income ratio increases if rate of return on capital (r) is greater than economic growth rate (g) (Atkinson, Piketty and Saez (2011) [1], Alvaredo, Atkinson, Piketty and Saez (2013) [2], Piketty (2011, 2014, 2015) [3]-[5], Piketty and Saez (2003, 2014) [6] [7], Piketty and Zucman (2014) [8] etc.). Following the recent literatures that pay attention to the dynamics of the external balance sheets of countries (Lane and Milesi-Ferretti (2007) [14], Gourinchas and Rey (2007) [15], Zucman (2013) [16], Piketty and Zucman (2014) [8] etc.), we construct a small open economy model where savings rate increases gradually from negative value, to examine if Piketty’s results for large countries are robust for such a country. Analysis of the present paper demonstrates that Kuznets curve (a hump-shaped trajectory ontime-capital/ income ratiospace, shown by Kuznets (1955) [17]), which Piketty (2014) [4] thinks to apply only to the early 1950s, is drawn for a small open country whose savings rate increases gradually from negative value. It is revealed that the capital/income ratio decreases in such a country if (1) the savings rate increases or (2) the return on capital increases
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