Interest rate policy,effective demand,and growth in LDCs

Orthodox criticisms of ‘financial repression’ in LDCs argue that interest rate liberalization promotes investment and economic growth by increasing the supply of bank credit and improving the efficiency of credit allocation. The present paper develops a Kaleckian model in which increases in deposit interest rates may lower investment and growth by placing downward pressure on effective demand – even if interest rate liberalization results in decreased borrowing costs. The focus of the Kaleckian model on effective demand issues is then contrasted with prior criticisms of the proliberalization view. Finally, the relevance of the Kaleckian approach is demonstrated in connection with the important role of effective demand and distributional effects in the failure of the Chilean financial liberalization to promote a stable growth of output and investment.     

A two-sector Kaleckian model of growth and distribution with endogenous productivity dynamics

This study extends a two-sector Kaleckian model of output growth and income distribution by incorporating endogenous labour productivity growth. The model is composed of investment goods and consumption goods production sectors. The impact of a change in wage and profit shares on capacity utilisation and output growth rates at the sectoral and aggregate levels are identified. The study reveals short-run cyclical capacity utilisation rates and productivity growth dynamics. Even if the short-run steady state is stable, the capital accumulation rate in the consumption goods sector must decrease more than that in the investment sector for long-run stability. When simultaneous rises in profit shares in both the sectors affect long-run aggregate economic growth differently at a steady state, the distributional interests between the same class in different sectors may hamper the long-run economic growth. A policy message is that the effect of income distribution on industrial output growth is not always beneficial. These phenomena are specific to two-sector models and cannot be observed when using conventional aggregate growth models.     

Kaleckian Effective Demand and Sraffian Normal Prices: Towards a reconciliation

Sraffians and Kaleckians alike reject the belief that higher rates of accumulation need be associated with lower real wage rates or higher propensities to save. The rejection of this proposition is mainly based on the endogeneity of the rate of capacity utilization, both in the short and the long run. This endogeneity often relies on a discrepancy between the realized and the normal rates of profit, or between the realized and the target rate of capacity utilization, a discrepancy which some authors believe is unwarranted in long run analysis. Various models that eliminate this divergence are outlined. In all these models, the normal rate of profit itself is taken as an endogenous variable. In the first two models, the normal rate of profit depends either on the realized profit rate or the rate of interest. Supply-led results may then reappear in long run analysis. In the last model, one introduces the possibility of a divergence between the rate of return as assessed and targeted by firms, and the rate of return that is actually incorporated into prices. This divergence arises because of the bargaining power of workers and their real wage resistance. Under these conditions, the demand-led results of the Kaleckian tradition are recovered in a model with definite solutions.     

Autonomous government expenditure growth,deficits, debt,and distribution in a neo-Kaleckian growth model

This article is linked to some recent attempts at including a noncapacity creating autonomous expenditure category as the driver and determinant of growth into Kaleckian distribution and growth models. Whereas previous contributions have focussed on taming Harrodian instability, generated by the deviation of the goods market equilibrium rate of capacity utilization from a normal or target rate, we rather focus on the so-far neglected issues of deficit, debt, and distribution dynamics in such models. For this purpose, we treat the growth of government expenditures on goods and services, financed by credit creation, as the exogenous growth rate driving the system. We examine the long-run convergence of the system toward such a growth rate, analyze the related debt dynamics, and deal with stability and income distribution issues. Finally, we touch upon the economic and, in particular, fiscal policy implications of our model results.     

Financialisation and Rising Shareholder Power in Kaleckian/Post-Kaleckian Models of Distribution and Growth

We establish the link between rising shareholder power on the firm level, increasing pressure on labour, and redistribution at the expense of wages, with the macroeconomic effects on capacity utilisation, profits and capital accumulation. Three channels of transmission of ‘financialisation’ and increasing shareholder power, the ‘preference channel’, the ‘finance channel’ and the ‘distribution channel’, are introduced into two different variants of the Kaleckian distribution and growth model, the Kaleckian model and the Post-Kaleckian model. Within these models, three potential regimes of accumulation are derived, the ‘contractive’ regime, the ‘profits without investment’ regime, and the ‘finance-led growth’ regime. Only the ‘profits without investment’ regime generates a strict micro-macro identity, whereas the other two regimes are characterised by fallacies of composition, a ‘paradox of accumulation’ in the ‘finance-led growth’ regime and a ‘paradox of profits’ in the ‘contractive’ regime.     

Stagflation,new products,and speculation

The paper looks at the macroeconomic implications of some recent developments in the theory of industrial organization. In a Kaleckian model, firms are assumed to invest heavily early in the product life cycle, thus creating effective demand. Conversely, it is assumed that late in the product life cycle firms hoard, waiting for new products in which to invest. Under reasonable conditions, the rates of growth, unemployment, and inflation can be related to the fraction of new products in the economy.     

Conflict,distribution, and finance in alternative macroeconomic traditions

Power and conflict are issues that loom large in the work of David Gordon. They are also issues that are largely absent in conventional macroeconomics. This paper shows how these concepts can be introduced within alternative macroeconomic traditions, and it shows how their significance depends on the particulars governing the construction of the macroeconomic process. The paper details the implicit economic process embedded in the new classical, neo-Keynesian, classical Marxist, and Kaleckian constructions of macroeconomics. It then develops a general post Keynesian model that fuses the insights of the classical Marxist and Kaleckian models regarding the significance of conflict and income distribution, with the insights of the neo-Keynesian model regarding the place of finance. Last, the paper argues that finance matters both for aggregate demand and as a worker discipline device. This represents a supply side channel for finance that links with modern new classical models that emphasize credit rationing     

Is the long-run equilibrium wage-led or profit-led? A Kaleckian approach

This paper presents a Kaleckian growth model in which (i) the rate of capacity utilization, the profit share, and the rate of employment are adjusted in the medium run, and (ii) the normal rate of capacity utilization and the expected rate of growth are adjusted in the long run. Both the Kalecki-type and the Marglin–Bhaduri-type investment functions are introduced. Using the model, we examine which regime is obtained in the long-run equilibrium, the wage-led growth regime or the profit-led growth regime.     

Toward the crisis: a Kaleckian-Keynesian interpretation of the instability of growth and capital accumulation in Brazil

This article examines theoretically and empirically the instability of Brazilian investment and growth for the past couple of decades, highlighting the evolution that led to the current crisis. A theoretical discussion highlights the importance of Kaleckian and Keynesian approaches in understanding the semi-stagnation of the Brazilian economy since the 1990s. Empirical evidence shows that investment has increased until 2013, but not to the point of getting the economy back on the track of high growth rates and higher investment-GDP ratios. The econometric findings are compatible with the theoretical underpinnings of investment activity based on Keynes and Kalecki and suggest the existence of room for activist policies in Brazil in order to stimulate economic activity.     

Currency devaluations,aggregate demand,and debt dynamics in economies with foreign currency liabilities

The article uses a post Kaleckian model to analyze how currency devaluations affect aggregate demand and capital accumulation in an economy with foreign currency liabilities in the short-run. In benchmark post Kaleckian open economy models, currency devaluations have two effects. First, they change international price competitiveness and thus affect net exports. Second, devaluations change income distribution and thereby affect consumption and investment demand. The overall effect on aggregate demand and investment is ambiguous and depends on parameter values. Existing models, however, disregard balance sheet effects that arise from foreign currency-denominated external debt. The article develops a novel post Kaleckian open economy model that introduces foreign currency-denominated external debt and balance sheet effects to examine the demand-effects of devaluations. Furthermore, the article models the dynamics of external and domestic corporate debt. It discusses how an economy may end up in a vicious cycle of foreign-currency indebtedness and derives the conditions under which indebtedness becomes stable or unstable. It shows that the existence of foreign currency-denominated debt means that contractionary devaluations are more likely, and that foreign interest rate hikes, and high illiquidity and risk premia compromise debt sustainability. Devaluations only stabilize debt ratios if they succeed in boosting domestic capital accumulation.     

Conflict,growth, distribution,and employment: a long-run Kaleckian model

This paper presents a Kaleckian growth model in which (i) the rate of capacity utilization, the profit share, and the rate of employment are adjusted in the medium run, and (ii) the normal rate of capacity utilization and the expected rate of capital accumulation are adjusted in the long run. The long-run equilibrium is a continuum of equilibria and is characterized by hysteresis in that the long-run position of the economy depends on where it starts. An increase in the bargaining power of workers lowers the rate of unemployment in both the medium-run and the long-run equilibrium.     

Long-run convergence in a neo-Kaleckian open-economy model with autonomous export growth

This study combines a neo-Kaleckian growth and distribution model with a sort of Sraffian supermultiplier mechanism in which autonomous demand is driven by foreign exports. Short-, medium- and long-run equilibria are considered. In the long-run case, the expectations of sales growth governing investment change adaptively, and this, combined with the autonomous growth rate of exports, produces convergence of the actual rate of capacity utilization to its normal rate. It is demonstrated that some aspects of the main Kaleckian results can be preserved not only in the short or medium run but also in the long run, in the sense that both (1) a decrease in the propensity to save, and (2) a change in income distribution favoring labor, bring about higher average rates of production growth and capital accumulation. However, the impact of a change in the profit share is shown to be subjected to the condition that the responsiveness of the real exchange rate with respect to the profit share has to be bounded from above, confirming that the scope for wage-led demand or wage-led growth can be limited by open-economy considerations, even within the supermultiplier context.     

Book Reviews

This paper reformulates Kalecki's investment models based on 'the principle of increasing risk'. First, it is shown that in his model risk can be interpreted as a conditional probability of bankruptcy of a firm, or the 'hazard rate' in reliability theory. Secondly, a simple static Kaleckian investment model is developed based on this interpretation. In the model, a slightly modified Kaleckian optimality condition for investment holds. It is also shown that, as Kalecki correctly pointed out, the principle of falling marginal efficiency of capital (or investment) is not required to obtain a finite level of investment. Finally, I consider sequential investment in an intertemporal model. In this model, a modified version of the Kaleckian optimality condition determines investment. In addition, as Kalecki emphasized, his increasing risk limits the level of investment even without increasing and convex adjustment costs associated with investment, by which the finite rate of investment is derived in the macroeconomics literature.     

Economic factors in the democratization of socialism and the socialization of capitalism

Part I discusses Wlodzimierz Brus' neo-Marxian theory of social change: political democratization as a necessary requirement for socialization of public means of production, and socialization necessary for economic efficiency. Then there is a short discussion of some related features of Marxian theory. Part II gives a model of technological change and of the dynamics of long-run growth. This leads to a discussion of the role of capitalism and authoritarian socialism in rapid growth. The author concludes that for “true democratic socialism” to evolve, the growth explosion of the industrial revolution should have run its course.     

Similitudes and Discrepancies in Post‐Keynesian and Marxist Theories of Investment: A Theoretical and Empirical Investigation1

There has been a substantial amount of convergence between post‐Keynesian and Marxist economics, the writings of Kalecki being common ground for both traditions. Still, some differences remain. While authors in both traditions seem to agree to a large extent on short‐period issues, long‐period matters relating to the role of saving, the rate of profit, inflation, crowding out, excess money supply, are still contentious. All this seems to depend on the exact form taken by the investment function, more specifically the role of capacity utilization. Four different equations are set up to be tested, two of which correspond to two variants of the Marxist view, while the other two equations correspond to a naive and a sophisticated Kaleckian view, the latter being based on hysteresis. The equations are tested on three sets of annual Canadian data. Various statistical tests are applied to all four equations in an effort to rank them, notably information and encompassing tests. The Kaleckian equation with hysteresis generally comes out empirically with the preferred statistical properties, when manufacturing data on actual rates of capital accumulation are considered separately or when both realized and intended rates of investment for the total industrial sector are used.     

Long horizon predictability of exchange rates: Is it for real?

This paper reexamines recent results on the predictability of nominal exchange rate returns by means of fundamental models. Using a monthly sample of the post-Bretton Woods period we show that the in-sample fit between long-horizon exchange rate returns and various models is not significant if we correct for the persistence that is caused by overlapping data and spurious regression phenomena. The long horizon out-of-sample predictive power of the fundamental exchange rate models is found to be very weak. This is especially the case when we conduct the out-of-sample forecasting tests for a longer time span than that of earlier papers. We show that this failure in forecasting performance, resulting from extending the time span, is due to the absence of cointegration between exchange rates and structural exchange rate models. First version received: September 1997/final version received: November 1998     

Endogenous technological change,income distribution,and unemployment with inter-class conflict

This paper presents a Kaleckian growth model that incorporates endogenous technological change. The model endogenously determines the rate of capacity utilization, the rate of economic growth, income distribution, and the employment rate in addition to technological change. The paper shows that whether or not an increase in the relative bargaining power of workers raises the long-run equilibrium unemployment rate depends on which regime is realized in the long-run equilibrium. If, for example, the long-run equilibrium corresponds to the wage-led growth regime, a rise in the relative bargaining power of workers leads to a decline in the unemployment rate. This result is never obtained from the mainstream NAIRU model.     

Fiscal policy,government debt,and economic growth in the Kaleckian model of growth and distribution

This article presents the Kaleckian model of growth and distribution that sets a budget deficit ratio as an indicator of fiscal policy and examines the short- and long-run effects of an increase in budget deficits and a rise in income tax rates on the economy. The key short-run outcomes are as follows. First, expanded budget deficits have a positive effect on the rate of capacity utilization. Second, the tax rate for wage income does not affect the rate of capacity utilization, whereas the tax rate for capital income has a favorable impact on it. This result implies that raising the tax rate for capital income can be an important policy instrument for stimulating the economy. Third, we find that the economy exhibits a wage-led aggregate demand in the short run. The main long-run results are as follows. First, the effect of expanded budget deficits on the growth rate is ambiguous, since a higher debt burden negatively influences the rate of capacity utilization and hence economic growth, despite the increase in demand caused by government borrowing. A higher budget deficit ratio thus raises the growth rate only if a certain condition is satisfied. Second, the tax rate for capital income has a positive impact on the growth rate. Third, the economy shows a wage-led growth in the long run.