Functional distribution of income as a determinant of importing behavior: An empirical analysis

We examine the impact of the functional distribution of income on the demand for imports in developed and developing countries. Drawing upon a motivating accounting structure unveiling a potentially causal effect of the functional distribution of income in a general specification of the import function, we find robust empirical evidence that an increase in the wage share has a statistically significant negative (positive) impact on the volume of imports in developing (developed) countries. Therefore, the neglect of such income distribution effects in import demand functions represents the omission of both an empirically relevant variable and a theoretically significant channel through which the functional distribution of income affects output growth under conditions of balance-of-payments constraints and a competitive real exchange rate.

Keywords: Functional distribution of income; import demand; aggregate demand regimes; balance-of-payments-constrained growth.