Money, Growth and Disequilibrium

Abstract

The analysis of the trilogy of the title receives an increasing attention in the literature. Malinvaud (1980) analyses the dynamics of a disequilibrium model with a fixed-coefficients technology and an investment function that is common to all disequilibrium regimes. His main conclusion is that only Keynesian equilibria are stable in the long run. Laussel (1980) generalizes this model by relaxing these two assumptions. Several cases appear in his model, but Malinvaud's conclusion is in general vindicated. The present paper shows how a strong wealth effect can stabilize the other types of steady states. However, a complete analysis of the investment function involves a multiplication of the number of disequilibrium regimes. This follows from the role of expectations in investment behaviour. Firms must take into account the various cases of disequilibrium they will have to face before reaching their target capital stock. This reduces the attractiveness of the disequilibrium model as a tool for macroeconomic analysis, because of its exaggerated complexity. Following the tradition of neoclassical growth theory, we sidestep this issue and consider a two-asset-money and capital-world, as Tobin (1961, 1969) advocated. B6hm (1978) has analysed the dynamics of money in a disequilibrium framework, but his model ignores capital accumulation. By contrast, our present model puts the emphasis on portfolio equilibrium, somewhat in the IS-LM tradition (Tobin, 1969). We assume an economy without corporate veil, where profits are wholly received as dividends by households. In Bohm's model these profits are taxed away by the government, while Barro and Grossman (1976), Malinvaud (1977) and Laussel (1980) assume a fixed interest rate. In our model, firms take the real wage rate as given, and determine the rate of interest by paying dividends to their owners. On the asset side, we assume a standard demand-for-money function. As there are only two assets, the demand for capital is defined implicitly by the adding-up conditions (Tobin, 1969), and the investment function could be derived from it, given an initial capital stock. The model is specified in Section I, and its temporary equilibria analysed in Section II. Accumulation of capital is the subject of Section III.