Economic Policy and Income Distribution : The case of France since the early 1970s.

Summary The central idea of our analysis of the French economy concerns the supremacy of interest rates and public spending as instruments of economic policy. With the sharp rise in interest rates in the early 1980s, non-financial firms began to demand less credit, while French households, as well as other developing economies, demanded more. In parallel with these developments, speculative markets dominated the stock market, unemployment rates rose, and a process of liberalization followed. We analyze the consequences of this financialization process and some possible scenarios in France, while using a Cowles Commission type model, which is in turn based on the stock-flow literature. Particular attention is given to distributional and fiscal variables. The results of the model indicate that (given that French firms are caught in a liquidity trap) the interest rate has lost its power as a policy variable. In contrast, government spending has significant expansionary power.