neo-Kaleckian Model Research Articles

Finance, Financial Adjustments and Alternative Closures in Neo-Kaleckian Models: The Paradoxes of Thrift and Costs in the Long-Run

ABSTRACT Heterodox economists debate if Keynesian/Kaleckian or Marxian/Harrodian results apply in the long-run. This paper explores different financial mechanisms in neo-Kaleckian models with the: (1) traditional closure of an endogenous utilisation rate; and, (2) supermultiplier closure where the utilisation rate is restored to its normal degree in the long-run. Keynesian/Kaleckian results are obtained regardless of the assumptions on the utilisation rate. Attention is also given to circuitist intra-period endogenous money financing relations, and to financial adjustments that increase the elasticity of household portfolio adjustments and firm liability-side management.

Debt and demand regimes in simplified growth models: a comparison of neo-Kaleckian and Supermultiplier models

Abstract The paper compares stock-flow consistent (SFC) versions of extended canonical neo-Kaleckian and Supermultiplier models that deal with either households’ or firms’ debt accumulation. This comparison aim is twofold: (i) to evaluate the differences of a debt accumulation process in these models due to their specific closures; (ii) to provide a pedagogical tool for understanding the basic features of each model when dealing with similar issues. In the short run, we find that the relation of debt ratios, demand and growth is similar for both models. In the long run of the Supemultiplier model, only the Minskyan debt regime is economically viable for the firms’ sector. As for the household sector, the paradox of debt is indeed a feature of the canonical Supermultiplier model, yet there may be episodes of rising debt-toincome ratios. As for the neo-Kaleckian model, firms’ leverage ratio can be either pro- or anti-cyclical; in the household sector, the absence of the paradox of debt seems to be the most likely scenario.

Inequality, Consumption Emulation, and Growth

We develop a short-run neo-Kaleckian model to investigate the interplay of the functional and personal distribution of income and their impact on growth. Personal distribution becomes relevant in light of the institutionalist hypothesis of consumption emulation, which makes aggregate saving dependent on the concentration of wages and profits. A more equal distribution of wages and/or profits increases aggregate demand and the rate of capacity utilization. But the wage- or profit-led demand regime crucially depends on the difference between the propensity to save out of profits and that out of wages, as well as on the impact of changes in the profit and wage shares on the concentration of personal incomes. Preliminary evidence on Italy over the period 1980s–2010s highlights that demand regimes might be a relatively short-term and cyclical characteristic of that economy, with changes in the demand regime partly explained by changes in personal income distribution. JEL Classification: E11, D31, B52

Critical notes on some recent Neo-Kaleckian contributions on capacity utilization

Within the non-mainstream growth literature, the Neo-Kaleckian model is the only one that presents an endogenous capacity utilization in the long run. After systematizing the debate around recent contributions, presenting the baseline and extensions of the Neo-Kaleckian model and providing some notes on the normal rate of capacity utilization, I critically assess three recent alternatives that try to justify endogenous utilization in Neo-Kaleckian models. All these contributions present different theoretical and empirical shortcomings that should be addressed in order to substantiate their claims.

On the utilization controversy in the demand-led growth literature: A quantile unit root approach

The demand-led growth literature is embroiled in a controversy surrounding the long-run stationarity of capacity utilization. One perspective posits that a non-stationary rate of capacity utilization implies its endogeneity to aggregate demand, aligning with the neo-Kaleckian model. In contrast, an opposing viewpoint suggests the possibility of long-run stability independent of demand fluctuations. Conventional empirical approaches generally support the latter viewpoint. This study proposes a novel way to estimate capacity utilization persistence by using a quantile autoregression (QAR) model, which allows for the possibility that shocks of different signs and magnitudes impact capacity utilization differently. Using official survey measures from developed and developing countries, we find evidence in favor of local unit root tendencies, with recessions exhibiting persistent effects on utilization. Additionally, we identify an asymmetric capacity utilization response, where, in general, recessive shocks are persistent while positive shocks are transitory. These results provide a fresh perspective on how capacity utilization responds to different economic conditions.

Investment, autonomous demand and long-run capacity utilization: an empirical test for the Euro Area

This paper reviews and empirically tests the validity of the Sraffian Supermultiplier model (SSM) and the modified Neo-Kaleckian model after the inclusion of autonomous components of aggregate demand. First, we theoretically assess whether the SSM may constitute a complex variant of the Neo-Kaleckian model. In this sense, it is shown that results compatible with the SSM can be obtained by implementing a set of mechanisms in a modified Neo-Kaleckian model. Second, the paper empirically tests the main implications of the models in the Euro Area, based on Eurostat data. In particular, the discussion outlines the short and long-run relation between autonomous demand and output, by testing cointegration and causality with a VECM model. Moreover, the role accounted by both theories to the rate of capacity utilization is empirically assessed, through a time-series estimation of the Sraffian and Neo-Kaleckian investment functions. While confirming the theoretical relation between autonomous demand and output in the long run, the results also show that capacity utilization still plays a key role in the short-run adjustment mechanism.

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

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.

Household debt, student loan forgiveness, and human capital investment: a neo-Kaleckian approach

This paper aims to analyze the sustainability of student debt in the US. For this purpose, I build a neo-Kaleckian model in which households can borrow to either consume or invest in human capital. Next, I calibrate the model using US data to simulate the economic effects of specific policies such as student loan forgiveness. To my knowledge, this is the first study that considers household borrowing for two different purposes, consumption and human capital accumulation, in a demand-led macro-modeling framework. The main findings are that (i) household debt is sustainable in the long run (i.e., the debt servicing is compatible with the long-term economic growth) for a consumption level greater than 90% of household income; (ii) new borrowing boosts short-term economic activity while having ambiguous long-term effects because of its outcomes to household indebtedness and debt servicing; and (iii) student loan cancelation has only short-run economic effects, whereas reducing loan interest rates and changing the eligibility criterion for student loan forgiveness result in long-term effects.

Varieties of peripheral capitalism: on the institutional foundations of economic backwardness*

This paper critically analyses the literature spawned by Peter Hall and David Soskice’s influential book on the varieties of capitalism. It takes as a starting point the critiques within the comparative political economy literature about the supply-side views on economic growth, and the problems with emphasizing the nature of firm behavior as the source of institutional variety. It argues that demand-led growth, as discussed by Post-Keynesian authors, provides an important alternative to the conventional approach to the explanation of varieties of institutional experience. It suggests that understanding the reasons for institutional variety within capitalism requires incorporating the work of Cambridge Keynesians which recovered the work of Classical political economy authors and extended Keynes’s ideas on effective demand to explain the process of accumulation. It also requires incorporating the ideas of Prebisch and the Latin American Structuralists, who analysed the limits to accumulation in peripheral countries. The paper also discusses the limitations of Neo-Kaleckian models of demand-led growth used by some authors in the comparative political economy literature, and it suggests a new taxonomy for ordering varieties of capitalism.

Activity Levels and the Flexibility of the Degree of Capacity Utilisation in the US

ABSTRACT In recent years, a revival of the so-called ‘utilisation controversy’ has seen several scholars engage in a lively debate that still revolves around the same old question: what should we expect, beyond the short run, with regard to the degree of capacity utilisation? In this article, we tackle this issue by investigating the relationship between the level of economic activity and the ensuing utilisation of existing capacity. In order to assess the effect of the former on the latter and to provide a robust and clear picture of this phenomenon, we use a Structural VAR and Local Projection methodologies to estimate three alternative models, based on monthly data on the US economy. After presenting our empirical results, which point to only temporary effects on capacity utilisation of shocks to the level of economic activity, we verify their compatibility with alternative demand-led growth models. We conclude that autonomous demand-led models cum convergence towards normal utilisation perform better in terms of consistency with the econometric evidence, while the latter seems to call for a re-examination of ‘conventional’ versions of the Neo-Kaleckian model.

Reflections on neo-Kaleckian growth regimes: a Marxian reproduction perspective

PurposeThe neo-Kaleckian model follows the ideas of Marx, Keynes and Kalecki, that investment is a key influencing factor in the dynamics of the capitalist mode of production. Through the discussion of different forms of investment decision function, this paper constructs the analysis framework of wage-led and profit-led economic growth regimes.Design/methodology/approachThe model has become an important theoretical paradigm for current Western heterodox economists regarding the research on the impact of functional income distribution on economic growth, and it has a very large impact on both theoretical and empirical research. Starting from Marx's reproduction theory, this article discusses the theoretical shortcomings of the neo-Kaleckian growth regime model.FindingsThis paper mainly focuses on three aspects: (1) the ideological legacy of “Smith's Dogma”; (2) neglecting the restrictions on income distribution from the organic composition of capital and the surplus value rate; (3) technological progress and the formation of a new long economic wave.Originality/valueThe authors believe that the neo-Kaleckian model unilaterally emphasizes the demand-side factors in the economy and, unconsciously or not, ignores the role of the supply-side, which makes it encounter certain limitations in explaining long-term growth. Even if some empirical conclusions are employed to bridge functional income distribution and technological progress, there is still a lack of a theoretical basis for accurately describing long-term economic changes using this model. In order to better promote high-quality economic development and accelerate the formation of a new pattern of economic development in which the domestic large-scale cycle is the mainstay and the domestic and international double cycles promote each other, the authors need to adopt a policy combination with the supply-side as the main and the demand-side as the supplement, and to work from both sides.

Wage- and profit-led growth regimes: a panel-data approach*

The extensive empirical effort made in the growth and distribution literature to estimate whether economic growth is wage- or profit-led has not sufficiently considered the theoretical foundation of the Neo-Kaleckian model. This paper attempts to respect key tenets of the investment function by estimating a panel-data model in which country-specific structural characteristics and possible endogenous relationships in income distribution and economic growth are explicitly considered. The identification strategy is based on several estimates of the capital stock and the rate of capacity utilization for 61 countries over the period between 1995 and 2014. The main results suggest that the growth regime was wage-led in developed countries, while most developing countries exhibited a profit-led growth regime. Interestingly, however, while the profit-led regime occurs through the international trade channel in Latin American countries, in other developing countries, the causality channel is mainly related to the domestic investment function.

Demand-led growth and functional income distribution in Brazil from 1952 to 2017

Abstract This work aims to investigate the effect of changes in functional income distribution on growth in Brazil from 1952 to 2017. Following the neo-Kaleckian and Supermultiplier growth and distribution theories, it is possible to obtain two types of such effects. First, a level effect, predicted by both models, establishes a direct relationship of the wage share on the level of output through changes in the components of aggregate demand. Secondly, a growth effect occurs only in the neo-Kaleckian models and is the causal relationship between the wage share and output growth through the rate of capital accumulation. We analyzed the presence of these two effects in the empirical literature and found no evidence of a long run growth regime through capital accumulation as would be expected in the neo-Kaleckian model. However, we find empirical evidence that investment is an induced component of demand as is expected in the Supermultiplier model.

Heterogeneous unit labor costs and profit margins in an economy with vintage capital: an amended neo-Kaleckian model

Post-Keynesian literature studying the impact of functional income distribution on economic activity and growth focuses on indirect demand effects (i.e., the consequences of real wage changes on aggregate demand components). The purpose of this article is to explore two points neglected by this literature. First, it ignores the direct supply effects corresponding to the impact of real wage changes on firms’ current profitability. Second, it does not explicitly take into account capital heterogeneity as a consequence of embodied technical progress. We, therefore, analyze the properties of a neo-Kaleckian model that includes both labor productivity differences between firms and the necessary condition of positive profits to engage in production. We show that the positive impact of real-wage increases on effective demand forces some firms to stop production because they become unprofitable. Moreover, the increase in effective demand can be impeded by the decrease in the capacity of profitable firms. Therefore, a recovery of economic activity through wage increases reaches its limits when profitable firms are at full capacity. The model also highlights the importance of technical competition and its role in firms’ behavior regarding capital replacement.

Overhead Labour Costs in a Neo-Kaleckian Growth Model with Autonomous Non-Capacity Creating Expenditures

ABSTRACT A notable feature of income distribution is the widening wage differential among workers: there is a redistribution in favour of managers at the detriment of ordinary workers. The paper incorporates this distinction between overhead managerial labour and direct labour into a neo-Kaleckian growth model with target-return pricing, where an autonomously growing demand component ultimately determines the long-run path of an economy. Our aim is to explore the role of overhead labour costs in the coevolution of income distribution and economic growth. We find that the profit share becomes an increasing function of the rate of capacity utilization, implying that empirical research based on the post-Kaleckian specification of investment is likely to be biased in finding a profit-led regime. Our model also features convergence to a fully adjusted position. We examine the parametric conditions under which the model achieves a wage-led growth regime in the long run, in the restricted sense that both the average rates of accumulation and utilization decrease during the transitional dynamics arising from an upward adjustment of the normal profit rate. Moreover, it is shown that a more equitable wage distribution between managers and ordinary workers will strengthen the wage-led nature of the economy.

Personal Income Distribution and Progressive Taxation in a Neo-Kaleckian Model: Insights from the Italian Case

ABSTRACT This paper develops a stylized short-run neo-Kaleckian model incorporating personal income inequality and income taxes. The main goal is to investigate how changes in income taxes and personal income distribution affect output growth. The theoretical discussion of the stylized model is then empirically assessed using data for Italy retrieved from the Survey of Household Income and Wealth published by the Bank of Italy. The empirical analysis confirms both the heterogeneity of the propensities to consume of Italian households and the dominance of absolute income effects in the Italian consumer behavior that assures the negative trade-off between inequality and aggregate demand. More specifically, it is shown that, overall, Italians are still income constrained, not allowing for a compensation of the demand-depressing effects of raising inequality via debt and wealth-based consumption. Likewise, it is argued that decreasing personal income inequality via progressive income tax reforms would have positive effects on aggregate demand, utilization, and growth.

Harrodian instability in decentralized economies: an agent-based approach

Harrodian instability emerges in post-Keynesian models because of the cumulative feedback between demand and investments. This paper presents a novel approach to deal with Harrodian instability. The main contribution is methodological and lies in the different theoretical mechanism adopted to avoid unstable dynamics. While the common approach relies on aggregative investment functions, we emphasize the role of heterogeneity in expectations as a stabilization device. We introduce a small-scale agent-based version of the so-called neo-Kaleckian model. The model features a parsimonious microfoundation of investment decisions. Agents have heterogeneous expectations about demand growth and set their investment expenditures in a decentralized way. Interactions occur through demand externalities. We present results for different scenarios. First, when heterogeneity is ruled out, Harrodian instability is shown to emerge as for the aggregate model. Instead, when heterogeneity is accounted for, a stable dynamics with endogenous fluctuations arises. At the same time, in this second scenario, all the Keynesian implications are preserved, including the presence of macroeconomic paradoxes. Sensitivity analysis confirms the general robustness of our results and the logical consistency of the model.

Autonomous demand and the investment share*

This paper looks at the effect of demand shocks on the investment share of the economy. Using panel data on 20 OECD countries, we show that the rate of growth of autonomous demand (exports, public spending, and housing investment) is positively correlated with subsequent values of the share of business investment in GDP. By means of an instrumental-variables (IV) strategy, we confirm a positive effect of demand dynamics on the business investment share. We instrument autonomous demand with (i) US demand for imports interacted with exposure to trade with the US, (ii) openness to trade of a country's main export destinations, and (iii) military spending. A permanent 1-percentage-point increase in autonomous-demand growth raises the investment share by 1.5 to 1.9 percentage points of GDP in our preferred panel IV specification. Our results provide empirical support for the view that the influence of aggregate demand on capital accumulation can be a major source of hysteresis. Our results are inconsistent with the canonical New Keynesian three-equations model, the Neo-Kaleckian model with flexible equilibrium utilization, and Classical–Marxian growth models. A positive influence of autonomous demand on the investment share is instead compatible with demand-led models in which capacity adjusts to demand in the long run.

Autonomous demand and the investment share

This paper looks at the effect of demand shocks on the investment share of the economy. Using panel data on 20 OECD countries, we show that the rate of growth of autonomous demand (exports, public spending, and housing investment) is positively correlated with subsequent values of the share of business investment in GDP. By means of an instrumental-variables (IV) strategy, we confirm a positive effect of demand dynamics on the business investment share. We instrument autonomous demand with (i) US demand for imports interacted with exposure to trade with the US, (ii) openness to trade of a country's main export destinations, and (iii) military spending. A permanent 1-percentage-point increase in autonomous-demand growth raises the investment share by 1.5 to 1.9 percentage points of GDP in our preferred panel IV specification. Our results provide empirical support for the view that the influence of aggregate demand on capital accumulation can be a major source of hysteresis. Our results are inconsistent with the canonical New Keynesian three-equations model, the Neo-Kaleckian model with flexible equilibrium utilization, and Classical–Marxian growth models. A positive influence of autonomous demand on the investment share is instead compatible with demand-led models in which capacity adjusts to demand in the long run.

The debate about Sraffian Supermultiplier Model and the future of heterodox growth models

ABSTRACT This paper aims to present the recent debate about Sraffian Supermultiplier Model (SSM), that gained notoriety in the academic environment after the controversy between Peter Skott (2016) and Marc Lavoie (2016, 2017) on the specification of the investment function of the Neo-Kaleckian models of income growth and distribution. Lavoie used the SSM model as an attempt to rescue the Neo-Kaleckians models of the devastating criticism made by Peter Skott (2010) regarding the specification of the investment function. In this context, we will not only argue that this rescue operation was not successful, but we will also question the capacity of SSM models to serve as an “alternative closure” for heterodox models of income growth and distribution, due to three fundamental shortcomings of the SSM approach, which are: (i) the hypothesis that the normal degree of utilization of the productive capacity is an exogenous variable, (ii) that investment in capacity expansion is totally endogenous; and (iii) the applicability of this approach out of a closed economy framework. We will also argue that the Kaldorian models of growth, which are one of the theoretical foundations of the so-called Developmentalist Macroeconomics, and stock-flow consistent models (SFC) seem to be much more promising alternatives for the development of heterodox theories of growth and income distribution.