Firm Beliefs and Long-Run Demand Effects in a Labor-Constrained Model of Growth and Distribution

22 Pages Posted: 4 Mar 2019 Last revised: 20 May 2019

See all articles by Daniele Tavani

Daniele Tavani

Colorado State University, Fort Collins - Department of Economics

Luke Petach

Belmont University

Date Written: May 17, 2019

Abstract

One of the most debated questions in alternative macroeconomics regards whether demand policies have permanent or merely transitory effects. While Kaleckian ecoomists have argued that demand matters even in the long run, both economists operating within other Keynesian traditions (e.g. Skott, 1989) as well as Classical economists argue that in the long-run output growth is constrained by the so-called natural rate. This paper attempts to bridge the gap by analyzing the role of firm beliefs about the state of the economy in a labor-constrained growth and distribution model based on Kaldor (1956) and Goodwin (1967) but featuring an explicitly dynamic choice of capacity utilization. We show that: (i) the relevance of such beliefs generates an inefficiently low utilization rate and labor share in equilibrium; but (ii) the efficient utilization rate can be implemented through fiscal policy. Under exogenous technical change, (iii) the inefficiency does not affect the equilibrium employment rate and growth rate, but expansionary fiscal policy has positive level effects on both GDP and the labor share. However, (iv) with endogenous technical change a la Verdoorn (1949), fiscal policy has also temporary growth effects. Finally, (v) the fact that the choice of utilization responds to income shares has a stabilizing effect on growth cycles, even under exogenous technical change, that is analogous to factor substitution.

Keywords: Beliefs, Capacity Utilization, Coordination Failures, Factor Shares, Fiscal Policy

JEL Classification: D25, E12, E22, E25, E62

Suggested Citation

Tavani, Daniele and Petach, Luke, Firm Beliefs and Long-Run Demand Effects in a Labor-Constrained Model of Growth and Distribution (May 17, 2019). Available at SSRN: https://ssrn.com/abstract=3333410 or http://dx.doi.org/10.2139/ssrn.3333410

Daniele Tavani (Contact Author)

Colorado State University, Fort Collins - Department of Economics ( email )

Fort Collins, CO 80523-1771
United States

HOME PAGE: https://economics.colostate.edu/author/dtavani/

Luke Petach

Belmont University ( email )

1900 Belmont Blvd.
Nashville, TN 37212-3757
United States

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