Episodic incidence of Harrodian instability and the Kaleckian growth model: A Markov‐switching approach

Abstract

AbstractTo assess the conditional stability properties of the Kaleckian growth framework in the medium‐run, I investigate behavioral corridors where investment will be unresponsive to departures of actual from desired utilization rates—thus providing for the episodic incidence of Harrodian instability. I empirically assess this relationship using two‐state Markov‐Switching Structural Vector Auto‐Regression fit on non‐residential fixed investment and the rate of capacity utilization for the United States. To directly assess the relevance of a behavioral corridor for the cyclical dynamics of the endogenous variables, the probabilities governing the transition between hidden states are modelled as a time‐varying function of gap between realized utilization rates and their long‐run average. Results suggest the response of investment to structural utilization shocks is highly regime‐dependent and predominantly occurs during business cycle downturns.