Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
988541 | Structural Change and Economic Dynamics | 2014 | 20 Pages |
•We reconcile a constant long-run utilization rate with the principle of effective demand in a structuralist growth model.•The capacity output-capital ratio is endogenized and argued to move pro-cyclically.•We introduce Harrodian instability and stabilizing distribution and debt dynamics.•With non-linearities in the investment function the model generates limit cycles.•The paradox of thrift as well as the paradox of cost may hold despite a constant long-run utilization rate.
Within the framework of an aggregative macro model with equilibrating output adjustment, Harrodian instability and a constant long-run utilization rate are reconciled with the principle of effective demand by endogenizing the capacity output-capital ratio. As stabilizing forces, distribution and debt dynamics are considered. Introducing non-linearities in the investment function, our model generates limit cycles consistent with empirical observations for the US, i.e. counter-clockwise in the utilization-wage share and utilization-debt space. We argue that with an endogenous capacity-capital ratio the principle of effective demand, the paradox of thrift as well as the paradox of cost may hold despite a constant long-run utilization rate.