Growth, Cycles, Asset Prices and Finance
24 Pages Posted: 10 Jan 2012
Date Written: February 2012
Several Kaleckian models are set out. Harrod‐ and Domar‐style investment functions are specified, and combined with distributive dynamics to generate Goodwin‐style cycles. A counterclockwise cycle in a two‐dimensional phase diagram for capacity utilization and the wage share is based on long‐run profit‐led demand and a profit squeeze at high activity levels, consistent with Domar. Harrod‐style investment and short‐run wage‐led demand generate counterfactual clockwise cycles. Financial dynamics involving the equity valuation ratio are considered. Both the ratio and equity price inflation demonstrate positive own‐feedback. The ratio can be stabilized cyclically by capital stock growth and/or rising household net worth or debt. Debt accumulation persists (or ‘overshoots’) after equity price inflation switches to a negative rate. A Minsky‐style model with Harrodian investment can be stabilized by accumulation of business debt.
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