Demand‐led growth with endogenous innovation

This paper contributes to the recent macro‐dynamics literature on demand‐led growth, drawing upon the seminal idea that the implications of Harrodian instability may be tamed by a source of autonomous expenditure in the economy. Contrary to the other contributions in this literature, real autonomous expenditure is not growing at an exogenously given rate, and partly consists of a flow of profit‐seeking R&D and innovation expenditures raising labour productivity through time. If the state of distribution, hence the wage share, is exogenously fixed and constant, the model gives rise to dynamics in a two dimensional state space, that may converge to, or give rise to a limit cycle around, an endogenous growth path. An exogenous rise of the profit share exerts negative effects on long‐run growth and employment, showing that growth is wage led.     

Convergence Towards the Normal Rate of Capacity Utilization in Neo‐Kaleckian Models: The Role of Non‐Capacity Creating Autonomous Expenditures

Neo‐Kaleckian models of growth and distribution have been highly popular among heterodox economists. Two drawbacks of these models have, however, been underlined in the literature: first, the models do not usually converge to their normal rate of capacity utilization; second, the models do not include the Harrodian principle of dynamic instability. Some Sraffian economists have long been arguing that the presence of non‐capacity creating autonomous expenditures provides a mechanism that brings back the model to normal rates of capacity utilization, while safeguarding the main Keynesian message and without going back to classical conclusions. The present article provides a very simple proof of this, showing within a neo‐Kaleckian model that the Harrodian principle of dynamic instability gets tamed by the presence of autonomous consumer expenditures.     

Autonomous Demand and the Harrodian Criticisms of the Kaleckian Model

Lavoie ( 2016 ) introduces autonomous demand in a defense of the (post‐) Kaleckian analysis against classical and Harrodian criticisms. This note corrects some errors in Lavoie's analysis, questions the stabilizing potential of autonomous demand, and points out some differences between the two variants of Lavoie's ‘neo‐Kaleckian’ model.     

The Trouble with Harrod: The fundamental instability of the warranted rate in the light of the Sraffian Supermultiplier

The paper argues that Harrodian instability is an instance of what Hicks in his book Capital and Growth (1965) called static instability, related to the direction (and not to the intensity) of the disequilibrium adjustment process. We show why such instability obtains in demand‐led growth models in which the ratio of capacity creating private investment to output ratio is given exogenously by the aggregate marginal propensity to save. We also show that Sraffian Supermultiplier model overcomes the Harrodian instability and that its demand‐led equilibrium is statically stable. It is explained that the latter results do not follow from the presence of autonomous non‐capacity creating expenditure component as such but from its presence within a model in which investment is driven by the capital stock adjustment principle (i.e., the flexible accelerator). Finally, we argue that, although being statically stable, the equilibrium growth path of the Sraffian Supermultiplier model can be dynamically stable or unstable depending on the intensity of the reaction of investment to demand. We then provide a discrete time sufficient condition for the dynamic stability of such equilibrium that implies that the marginal propensity to invest remains lower than the marginal propensity to save during the adjustment process, a modified Keynesian stability condition.     

Can monetary policy tame Harrodian instability?

The paper introduces monetary policy into the canonical Kaleckian growth model with a built‐in Harrodian instability. It abstains, however, from the simple and immediately stabilizing interest rate inverse IS curve. Instead, more indirect effects are examined, which realistically will take time to work out. In particular, (a) the trend rate of growth governing the investment decisions additionally responds to the difference between the profit rate and the real rate of interest; and (b) the real interest rate may enter dynamic adjustments of the price markup. The main finding is that the Harrodian forces could still be overcome and stability of the steady state position is re‐established provided that the profitability motive in (a) and the responsiveness in the Taylor policy rule are both sufficiently strong. By contrast, the indirect feedback effects produced by (b) broaden the scope for instability. In sum, monetary policy in this extended framework can favour stability but is not necessarily the stabilizing panacea that the New Consensus considers it to be.     

Trend and business cycles with external markets: Non‐capacity generating semi‐autonomous expenditures and effective demand

The Global Financial Crisis has underlined the importance of developments in the household sector to explaining macro patterns. Some recent papers have discussed the role of non‐capacity generating semi‐autonomous expenditures in growth theory. This literature ties together several aspects of heterodox thought: growth and distribution; the Sraffian supermultiplier; Duesenberry's relative income hypothesis; the endogenous money approach and Kalecki–Luxemburg external markets. The basic message is that non‐wage sources of effective demand, based on mortgage and consumer credit, can play a key role in inducing capacity investment and driving long‐run output growth. This article gives a broad overview of the role of financed‐induced semi‐autonomous expenditures in growth, cycles and crises, and thus criticizes some of the previous approaches that claim to mimic actual cycles while abstracting from these crucial determinants of economic activity.     

Some observations on models of growth and distribution with autonomous demand growth

This paper offers some theoretical and methodological observations on a model of growth and distribution, recently developed by Franklin Serrano and others and called the Sraffian supermultiplier model, in which the growth of autonomous capitalist consumption demand and distribution are exogenously given and capacity utilization is at an exogenously given “normal” level in long‐run equilibrium. First, it provides a simple long‐run equilibrium version and dynamic formulation of the model, and compares it to other models of growth and distribution using a common framework and focusing on the effect of a change in income distribution on growth. Second, it shows that the model can be modified to examine other components of autonomous demand growth, including government spending, exports, consumption by workers, and investment and technical change, and to simultaneous multiple sources of autonomous demand growth. Finally, it comments on some methodological issues concerning the model, and on its implications for the notion of long‐run equilibrium.     

Convergence of actual,warranted, and natural growth rates in a Kaleckian–Harrodian-classical model

This paper describes a dynamic one-sector macroeconomic model that draws on both post-Keynesian and classical/neo-Marxian themes. The model features an equilibrium in which Harrod’s actual, warranted, and natural growth rates coincide. Dynamic processes unfolding over both short and long time scales lead the economy to exhibit both business cycles and long waves. The Keynesian stability condition is assumed not to hold, so the model features short-run instability, which is bounded from above by a utilization ceiling. Labor constraints affect distribution through conflict pricing. In contrast to other Kaleckian–Harrodian models, we do not assume an exogenous source of demand. Instead, short-run instability is bounded from below by firms’ expectations that the downturn will eventually reverse.     

Fiscal and Monetary Policy Rules in an Unstable Economy

This paper examines the implications of different monetary and fiscal policy rules in an economy characterized by Harrodian instability. We show that (1) a monetary rule along Taylor lines can be stabilizing for low debt ratios but becomes de‐stabilizing if the debt ratio exceeds a certain threshold, (2) a ‘Keynesian’ fiscal policy rule can stabilize the economy at full employment, (3) a fiscal ‘austerity’ rule that links fiscal parameters to deviations from a target debt ratio fails to adjust the ‘warranted’ to the ‘natural’ growth rate and destabilizes the warranted path and (4) instability may arise from a combination of fiscal and monetary policy rules which separately would stabilize the system.     

GROWTH,AUTONOMOUS DEMAND AND A JOINT‐PRODUCT TREATMENT OF FIXED CAPITAL

The aim of this paper is to shed light on the idea of demand‐led growth by exploring the relation between growth and autonomous demands in a two‐sector model that includes fixed capital with variable efficiency. The paper considers disequilibrium only in relation to quantities, with prices set at their long‐period levels. Results of computer simulations suggest that where producers' expectations of future growth allow for dispersion in past growth rates, as well future growth in autonomous demand, this may have a significant stabilizing effect on the dynamics of output and demand.     

Harrod's long‐range capital outlay as a stabilizer of Harrodian instability

Drawing on Harrod, Kalecki and Kaldor, this paper seeks to revive the view that ceteris paribus firms reduce investment if they have already built up high capacities relative to their assessment of the normal potential of their markets. This reaction introduces a fundamental stabilizing mechanism into the economy. The paper adapts the idea to a growth context and applies it to the neo‐Kaleckian baseline model with its Harrodian instability. It demonstrates that, in principle, a sufficiently strong feedback could stabilize the steady state.     

Harrodian instability in a post-Keynesian growth and distribution model

This article examines afresh the problem of Harrodian instability by incorporating into a post-Keynesian growth model an additional link, first proposed by Adrian Wood (A theory of profit, 1975), between firms’ pricing policies (which determine their profit margins) and their accumulation policies. It is assumed that firms’ pricing strategies are wholly linked to their need to self-finance some of their investments. Such a link suggests, a priori, that there is an endogenous self-correcting force, originating at the micro-level, that is capable of mitigating Harrodian instability. When investment increases or declines uncontrolledly, the variation in the accompanying profit margin is able to exert a contrary smoothing effect on effective demand (through changes in the multiplier). It is shown, firstly, that this effect is such that it leads to the emergence of a basin of attraction for multiple stationary growth rates. However, there is every likelihood that the growth rates in this basin of attraction will be higher than the natural growth rate (and will therefore be unsustainable in the long term). It is shown, secondly, that a sufficiently high budget deficit makes it possible to draw the convergent growth rate space towards a state of stationary equilibrium within the “sphere of the possible”. It is shown, finally, that the state has sufficient room for manoeuvre to arbitrate between competing objectives (employment–distribution–budget deficit) by virtue of the existence of a whole continuum of stationary equilibria.     

THE INFLUENCE OF DIFFERENT FORMS OF GOVERNMENT SPENDING ON DISTRIBUTION AND GROWTH

This paper deals with the influence of different types of government expenditure on growth in a post‐Keynesian framework. The analysis considers a government sector with a balanced budget and an autonomous and non‐linear investment function, interpreted along a Kaleckian and a Classical‐Harrodian line. It shows under which conditions different types of government expenditure are beneficial or detrimental for economic growth, comparing some results with those reached by Barro in his 1990 Journal of Political Economy article, and points out the emergence of phenomena like multiple equilibria, hysteresis and low growth traps.     

Endogenous Cycles and Chaos in a Capitalist Economy: A Circuit of Capital Model

This paper introduces a firm‐level simulation model of the circuit of capital with financially extended Harrodian investment behavior. The model demonstrates that capitalist economies with heterogeneous firms can endogenously generate chaotic cycles. Stability and bifurcation analyses show that the (Harrodian) instability of the system is caused by the firm's ‘aggressiveness’ regarding the size of the ‘rent’ between investiments in the financial and the goods markets. Furthermore, the heterogeneity of firms results in a chaotic pattern of capital accumulation. Finally, a set of steady states around which the system fluctuates chaotically is found by solving the balanced growth problem.     

GROWTH AND DEVELOPMENT IN A HARRODIAN ECONOMY: WITH EVIDENCE FROM CHINA

In this paper, we construct a macrodynamic model that expresses the growth and development process in a less developed economy. The model introduces price, wage and government policy into an otherwise Harrodian economy. We find that these components can be regarded as stabilization mechanisms to overcome the destabilization mechanism in the original Harrod model and therefore the instability puzzles can be resolved. Using the evidence from China, we will show that the model can explore some important phenomenon with regard to growth and development in a less developed economy.     

The income inequality,financial depth and economic growth nexus in China

Income inequality has increased in China despite rapid economic growth. Income inequality could impinge on future development, leading to social tension or political instability. Our study investigates the short-run and long-run relationship between three important macroeconomic indicators—income inequality, economic growth and financial depth. We utilise a two-step procedure of ARDL bounds and Granger causality for the analysis. The bounds test indicates the presence of a cointegrating relationship between income inequality, financial depth and economic growth in the long run. In the second step, we utilise the Granger causality approach. Results show a bidirectional causality between financial depth-growth and a unidirectional causality between inequality-growth in the short run. In the long run, results reveal that growth and financial depth determine Gini. Our findings provide support for the inequality-widening effect due to economic growth and higher credit provided to the private sector. We find no evidence of inequality-narrowing or income-equalising effect in the long run for the period of study. It is possible that the government's inclusive growth policies which started less than a decade ago have not taken effect for us to capture the inverted U-shape income equalising effect significantly.     

A HARRODIAN KNIFE-EDGE THEOREM FOR THE WAGE-PRICE SECTOR

This paper investigates a positive self-reference of the rate of inflation onto itself as can exist in a standard medium run IS-LM model with an appropriately formulated dynamic wage-price sector. This self-reference represents a three-dimensional analogy to the one-dimensional positive feedback mechanism of the Harrodian analysis of unstable steady growth. It is shown in particular that this self-reference can overthrow the local asymptotic stability of such an IS-LM model in a cyclical fashion by means of a so-called Hopf bifurcation if the adjustment speed of the price level becomes sufficiently large.     

Understanding the Relationship between Inflation and Growth: A Wavelet Transformation Approach in the Case of Bangladesh

This paper re‐examines the relationship between inflation and economic growth in developing countries. Both the theoretical and the empirical literature are extremely divided on this issue. We apply a relatively new empirical technique – the continuous wavelet transform – to Bangladesh. Bangladesh is of interest because of its remarkable economic growth and poverty reduction during the last 30 years in combination with, for a developing country, a controlled inflation. The wavelet analysis is a contribution because it displays how the correlation and the lead–lag structure between variables change over timescales, taking into account that growth and inflation can follow several different cycles. Comovements between variables are generally studied in the time domain. Results from studies in the time‐domain study can be sensitive to the frequency of observations. On the other hand, studies in the frequency domain are not easily translated into time domains that can be associated with economic policies. The wavelet methodology finds a balance between time and frequency domains. Our study finds that growth Granger causes inflation at all frequency scales, starting from the short run to the very long run. Inflation, on the other hand, Granger causes growth in the long run but not in the short run. This result has implications for Bangladesh, and as such for similar developing countries, where some policymakers believe that inflation must be kept at very low levels for sustained economic growth.     

DEMAND POLICIES FOR LONG‐RUN GROWTH: BEING KEYNESIAN BOTH IN THE SHORT AND IN THE LONG RUN?

The idea of demand‐led growth is defended by neo‐Kaleckians and neo‐Keynesians using very specific assumptions. In their models the paradox of costs is always valid in the long run. The central message of this paper is that these specific and strong assumptions are not needed to defend the Kaleckian perspective of a demand‐driven long‐run growth. What is needed is simply a less demanding theory of flexible mark‐ups in an open economy. The formal model developed in this paper shows that long‐run growth may be demand driven even when the paradox of costs does not hold in the long run.     

Sustainable Public Debt and Economic Growth under Wage Rigidity

We analyse the effects of public debt on economic growth in a basic endogenous growth model with persistent unemployment due to wages rigidities. We show that there exists either a unique balanced growth path or there are two balanced growth paths depending on structural parameters and on the flexibility of the labour market. Further, public debt does not affect long‐run growth and employment but only stability of the economy. Stability is more likely when governments put a high weight on stabilizing the debt to GDP ratio.