Can monetary policy tame Harrodian instability?

Abstract

AbstractThe 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.