Does the demand regime matter over the medium run? Revisiting distributional issues in a portfolio framework under different exchange rate regimes

Is demand in capitalist economies wage‐led or profit‐led, and does this matter over time? Empirical studies have found conflicting results for different countries and periods. Possible reasons may include the endogeneity of distributional shares, differences in the monetary policy/exchange rate regimes across countries, and divergence between macro behavior in the short‐ and medium‐runs. I theoretically explore these possibilities using a portfolio balance framework to keep track of asset stocks and wealth effects over time. With fixed exchange rates, the Central Bank's need to intervene in the asset market via official reserve transactions results in assigning a crucial role to the current account in constraining demand and output. The binding nature of this constraint vanishes with flexible exchange rates. Regardless of the exchange rate regime, the most important message that emerges is that, once we impose plausible constraints on dynamic behavior, the demand regime may cease to determine the effect of redistribution on the steady state levels of utilization, profit rates, capital and wealth.