Wealth Inequality and Private Savings: The Case of Germany

IMF Working Papers, June 26, 2020

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Paper explores the interaction between corporate ownership concentration and private savings, and by extension, the current account balance in Germany.
Context: high corporate savings largely reflected capital income accruing to wealthy households and increasingly retained in closely-held firms.
Observed macro patterns: buildup of external imbalances in Germany accompanied by widening top income inequality, rising private savings, and compressed consumption rates.

Rising corporate profits in an environment of high business wealth concentration account for 90 percent of the rise in the private savings rate over 1999–2016.
Those rising corporate profits account for a third of the increase in the German current account surplus over 1999–2016.
The dynamics link corporate saving behavior, concentration of business ownership, top income inequality, and macroeconomic aggregates (private savings rate, consumption, current account).

Capital income accruing to wealthy households is increasingly retained in closely-held firms, leading to higher corporate savings.
High corporate savings translate into higher aggregate private savings and reduced household consumption rates.
Concentration of business wealth amplifies the effect of rising corporate profits on aggregate savings and external imbalances.

Addressing external imbalances in Germany may require attention to distributional drivers: corporate ownership concentration and the allocation of capital income.
Policies that influence profit allocation, corporate retaining of earnings, or the distribution of capital income could affect private saving behavior and the current account.
Consideration of how inequality dynamics interact with macroeconomic aggregates is important for comprehensive external-balance and domestic-demand policies.

Subjects: Disposable income, Income, Income distribution, Income inequality, National accounts, Private savings
Keywords: closely-held firm, corporate saving, current account surplus, Disposable income, Germany, Global, Income, Income distribution, income inequality, Income inequality, income share, inequality loop, investment behavior, net, NFC saving, Private savings, saving rate, wealth inequality, WP

Source: Mai Dao, "Wealth Inequality and Private Savings: The Case of Germany", IMF Working Paper, June 26, 2020.