How Short Is the Short Run in the Neo-Kaleckian Growth Model?

Abstract

ABSTRACT The paper provides an analytical solution to the differential equation that regulates the motion of the neo-Kaleckian model in the short run. After presenting a simple open economy neo-Kaleckian model with government activity, the paper analytically derives an expression for the time of adjustment, defined as the time required for the system to make a k percent adjustment from one steady-state to another. The solution shows that there is an inverse relationship between the time of adjustment and (i) the strength of the Keynesian stability condition; (ii) the behavior of entrepreneurs underlying their decisions to more rapidly/slowly respond to changes in goods market conditions. Last, the model is calibrated for the US, showing that the vicinity of the new equilibrium is reached after a period of about 5 quarters under a baseline calibration. By formally analyzing the out-of-equilibrium trajectory of the neo-Kaleckian model, this contribution moves away from the method of comparative dynamics and provides a historical-time representation of the model's traverse.