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.

KEYWORDS:

• Finance
• investment
• net financial saving
• monetary efflux and reflux

JEL CODES:

• B22
• B50
• E11
• E20
• E51
• O42

Acknowledgements

I would like to use this opportunity to acknowledge and thank the reviewers who reviewed this article and aided in its publication.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 See Duménil and Lévy (1999), Moudud (2009), Shaikh (2009) and the Harrodian “dual” economy of Skott and Ryoo (2008) and Skott (2010, 2020).

2 The closure of an endogenous utilisation rate is shared by the canonical neo-Kaleckian model (Rowthorn 1981; Dutt 1984) and the canonical post-Kaleckian model (Bhaduri and Marglin 1990).

3 See Palumbo and Trezzini (2003) for a critical Sraffian perspective on fully-adjusted positions.

4 See Cesaratto (2015), Freitas and Serrano (2015), Serrano and Freitas (2017), Brochier and Macedo e Silva (2019), Girardi and Pariboni (2019), Brochier and Freitas (2020).

5 See Allain (2015), Lavoie (2016), Dutt (2019), Cassetti (2020), Lavoie and Nah (2020), Fiebiger (2021, 2022), Hein and Woodgate (2021).

6 Note that, while Nikiforos (2016, 2018) labels his approach endogeneity in the normal utilisation rate, he uses an unconventional definition of the utilisation rate. In conventional definitions his approach implies an exogenous utilisation rate and endogenous capital-to-full-capacity output ratio. See Fiebiger (2020) for a critical discussion.

7 See Barbosa-Filho and Taylor (2006), von Arnim and Barrales (2015), Taylor et al. (2016), Tavani and Petach (2019, 2020), Barrales-Ruiz et al. (2020), Tavani and Zamparelli (2021).

8 See Skott (1989, 2010), Skott and Zipperer (2012).

9 See Rowthorn (1981), Lavoie (2014, Ch. 5), Lavoie and Nah (2020), Fiebiger (2022).

10 The superscript $f$ is used to denote flows before revaluation changes. See Lindner (2015).

11 Tobin (1969) supposes that firm fixed investment is a positive function of ; the ratio of the market value of the capital stock (as proxied by corporate equities) divided by its replacement cost, and especially if $q$ exceeds unity.

12 See Lavoie (2008), Skott and Ryoo (2008), van Treeck (2009), Bernardo, Stockhammer, and Martínez (2015).

13 Taylor’s (2004, p. 276) interpretation of Lavoie and Godley (2001–02) is odd given that their two regimes refer to the relative strength of investment function parameters for the utilisation rate and Tobin’s . One could therefore say that the normal (puzzling) regime is more likely to generate results that are “-burdened” (“-led”).

14 See Petri (2004) for a critical discussion of how the integration of Tobin’s into mainstream models tends to replicate the neoclassical assumption of an inverse relation between firm fixed investment and the interest rate.

15 The important task of integrating the SM approach with the post-Keynesian endogenous money approach has also received development from Cesaratto and Di Bucchianico (2020) and Cesaratto and Pariboni (2022).

16 The model implicitly assumes that firms set prices as a constant mark-up over production costs. An explicit pricing equation could be easily added; however, doing so would just add complexity (as output variables would need to be distinguished into real and nominal magnitudes) while making no difference to the modelling dynamics. See Lavoie and Nah (2020) and Fiebiger (2022) for NK-SM models that can generate an endogenous and pro-cyclical profit share through the addition of fixed overhead labour. The latter also extends the model to include a conflicting-claims approach to inflation that assumes the radical price adjustment mechanism.

17 The model thus overlooks banks’ operating costs and fixed investment, which while unrealistic, is a standard simplifying assumption in SFC models that include banks.

18 The importance of firms’ “internal funds” to fixed investment has received attention from Kalecki (1937), Steindl (1952 [1976]), Minsky (1975) and Fazzari, Hubbard, and Petersen (1988).

19 The conventional equity yield is that which households use as a benchmark to inform portfolio decisions; in the model $r_e^C$ is held constant for pedagogical purposes, but would in reality be a slow-adjusting variable that is informed by recent experiences of a normal financial return and the future expectations thereof.

20 Reducing debt issues by increasing equity issues will also put downward pressures on equity prices.

21 Results reported are the percentage point deviations from the baseline scenario of a constant growth rate. Simulations were run with Joao Macalos’s R software package: https://joaomacalos.github.io/sfcr/index.html.

22 The rationale for making $g_Z$ partially responsive to $g_{\mathrm{YD}}$ would seem to find some intellectual support from Keynes’s (1936, p. 96) psychological law for consumption: ‘[people] are disposed, as a rule and on the average, to increase their consumption as their income increases, but not by as much as the increase in their income’.

23 See Fiebiger (2021, 2022) for other formulations of the expected sales adjustment mechanism.

24 Some of the parameter and threshold variables are also modified.

25 Greater variation in the long-run equilibrium value of Tobin’s could be obtained by introducing low and high parameter thresholds for the equity yield in equation 39 and into the logical functions for the net earnings-to-equity price ratio in equation 43. However, as such extensions have only a comparatively minor influence on the equilibrium growth rate, we limit ourselves to the case given by equations 39–51.

26 Debt-burdened patterns emerge, not as a result of negative investment function parameters for $l$ (or $i\cdot \mathcal{L}/K$), but due to a casual chain that runs an increase in $g_K$ relative to $g_Z$ $\to$ higher (and $l$) $\to$ lower $u$ $\to$ slower $g_K$.

27 The NK model endogenises through the ${\alpha }_2$ parameter; however, the inclusion of $Z$ drastically increases the NK-SM model’s stabilising properties by making increase (decrease) the further that $g_K$ is above (below) $g_Z$.

28 We shall also mention that Skott’s (1988, 1989, 2010) NMNH models rule out the NK paradox of costs due to the assumption of a “profit-led” output expansion function.