Supply and Demand in Kaldorian Growth Models: A Proposal for Dynamic Adjustment

Abstract

ABSTRACT This article analyses the dynamic adjustment of supply and demand in Kaldorian growth models. We discuss how the growth rate of a country, given by demand constraints, adjusts towards the growth rate given by the supply-side, and vice versa, and present the necessary conditions and empirical plausibility for these adjustments. The Palley–Setterfield approach allows for a possible reconciliation between supply and demand long-term growth rates. However, this approach has some important empirical drawbacks, and we identify many considerations about the labour market in order to capture their analysis in a common framework. In this sense, we draw from the criticism developed by McCombie, and synthetize his view in terms of complete endogeneity, in a way in which employment adjusts immediately to guarantee equilibrium between supply and demand. The main contribution of this article is to propose a theoretical reconciliation between the Palley–Setterfield and the McCombie approaches, presenting an initially simple model focused on a labour market adjustment, in which both types of adjustment represent extreme cases. We also discuss the theoretical possibility and the characteristics of hysteresis effects that lead to intermediate cases.