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Ricardo Summa and Fabio Freitas

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Brett Fiebiger

As is well known, the closure of the canonical Neo-Kaleckian model is an endogenous rate of capacity utilisation. To allay concerns of Harrodian instability one response has been to endogenise the normal rate to effective demand pressures. Recent contributions have stressed microfoundations for an adjustment in the normal rate towards the actual rate. The new approach focuses on shiftwork and redefines capacity utilisation as the average workweek of capital. This paper examines whether the new concept of capacity utilisation can provide a firmer basis for endogeneity in the normal rate. It argues that the assumption of variability in the normal shift system cannot be generalised across manufacturing industries, while the potential relevance for non-manufacturing industries is unknown. Another concern is that long-run trends in the average workweek of capital and aggregate demand do not coincide. The paper also finds that the long-run trend in the US Federal Reserve's index of capacity utilisation for the manufacturing sector is not flat as frequently claimed. Instead, there is a downward trend from the mid 1960s, which matches the slowdown in aggregate demand.

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Franklin Serrano, Ricardo Summa and Vivian Garrido Moreira

This paper argues that the amended versions (financial wedge and secular stagnation) of the simple pragmatic New Consensus model are as open to theoretical criticism as the original one was. The authors show that: (i) the real natural rate of interest is unlikely to be negative, (ii) it (inconsistently) depends on the Neoclassical investment function drawn at a position of full employment in a model in which the economy is demand-constrained, and (iii) both investment and full employment saving are induced by the trend of demand in the longer run and this challenges the usefulness of the notion of a natural or neutral rate of interest, which (iv) are also subject to the Sraffian capital critique. This is then contrasted with an alternative simple Sraffian supermultiplier model in which the interest rate and the financial wedge are distributive instead of allocative variables, and there is no natural rate of interest since in the longer run there is no trade-off between consumption and investment and also no full employment of labor. As the capital stock adjusts to demand, potential (capacity) saving will be determined by investment, and both investment and capacity saving increase when consumption increases. Finally, we briefly illustrate how this alternative model could begin to make sense of the recent relevant stylized facts.

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Edited by Guillaume Vallet

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Edited by Guillaume Vallet

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Thomas I. Palley

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Emiliano Libman and Gabriel Palazzo

This paper highlights the role of external indebtedness and the presence of inflationary inertia in order to assess the effectiveness and sustainability of inflation targeting during disinflation episodes. As the recent Argentinian experience illustrates, a sluggish inflation rate and a significant current-account deficit may make the stabilization process difficult. To illustrate the point, we build a model that shows that, when inflation adjusts fast, the target may be achieved without building too much external debt. But if inflation adjusts slowly, an excessive build-up of external debt could lead to an increase in the risk premium, a sudden shortage of foreign exchange, and the eventual collapse of the inflation-targeting regime.

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Stefan Ederer and Miriam Rehm

If Piketty's main theoretical prediction (r > g leads to rising wealth inequality) is taken to its radical conclusion, then a small elite will own all wealth if capitalism is left to its own devices. We formulate and calibrate a Post-Keynesian model with an endogenous distribution of wealth between workers and capitalists which permits such a corner solution of all wealth held by capitalists. However, it also shows interior solutions with a stable, non-zero wealth share of workers, a stable wealth-to-income ratio, and a stable and positive gap between the profit and the growth rate determined by the Cambridge equation. More importantly, simulations show that the model conforms to Piketty's empirical findings during a transitional phase of increasing wealth inequality, which characterizes the current state of high-income countries: the wealth share of capitalists rises to over 60 per cent, the wealth-to-income ratio increases, and income inequality rises. Finally, we show that the introduction of a wealth tax as suggested by Piketty could neutralize this rise in wealth concentration predicted by our model.

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Carlos Aguiar de Medeiros

This paper provides a critical assessment of the New Developmental view summarized in . It is argued that although New Developmentalism correctly observes that Classical Developmentalism underestimated and insufficiently considered the role of demand as a motor of growth (this critique also applies to modern Schumpeterian views), New Developmentalism theoretically reduces or explains changes in quantities (in particular external demand) to the price mechanism (in particular the exchange rate). It is argued that the New Developmental narrative of comparative development underestimates the role of industrial policy and domestic demand in increasing productivity. Instead, New Developmentalism makes the real exchange rate the main lever for investment, structural change, and productivity growth. At the same time, New Developmentalism's description of some development trajectories is actually (though it is unacknowledged) closer to Classical Developmentalism, modern Institutionalism, and Schumpeterian thinking. Those intellectual traditions argue that development and structural change require strategic policies which go far beyond managing macroeconomic prices.

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Thomas I. Palley, Esteban Pérez Caldentey and Matías Vernengo