Supply and demand in Kaldorian growth models: a proposal for dynamic adjustment
Guilherme R. Magacho & Danilo Spinola
#2020-032
This paper analyses the dynamic adjustment of supply and demand in
Kaldorian growth models. We discuss how the growth rate of a country
given by the demand constraints may adjust towards the growth rate given
by the supply-side (and vice-versa), presenting the necessary conditions
for this adjustment. Our main conclusion is that, for a monopolistic
economy, where firms invest to maintain a constant level of capital
utilisation, there are no capital constraints and hence the degree of
capacity utilisation is not affected by this adjustment. Nevertheless,
depending on specific conditions, an economy may face labour
constraints, and thus an adjustment mechanism is necessary. The
Palley-Setterfield approach for this dynamic adjustment brings a
possible reconciliation to supply- and demand-side long-term growth
rates. It emphasises the endogeneity of the income-elasticities of
demand for imports and the Verdoorn coefficient to utilisation capacity.
However, some considerations about labour market have to be discussed in
order to understand the characteristics and limitations of this
approach. In this sense, we draw from the McCombie (2011) critique, in
which employment adjusts immediately to guarantee equilibrium between
supply and demand. We propose reconciliation between the
Palley-Setterfield and the McCombie approaches, and present a model with
a labour market adjustment in which both types of adjustments represent
extreme cases, discussing the existence and the characteristics of
intermediate cases.
Keywords: economic adjustment, demand-led growth, natural rate of growth, Kaldorian growth models
JEL Classification: E12, F43, O41