Money, fiscal policy and the Cambridge theorem

Abstract

This paper extends the Cambridge theory of income distribution to a monetary economy and explores the implications of fiscal deficits that are money financed. It is shown that the Pasinetti Paradox represents a special case applicable to either a nonmonetary economy or a monetary economy with constant prices. Once steady-state inflation is introduced, this generates an inflation tax on money holdings which affects saving. If the distribution of money holdings depends upon relative consumption shares, then the savings propensity of workers affects the distribution of the burden of the inflation tax, which in turn affects the profit rate and profit share. Copyright 1997 by Oxford University Press.