This note reconsiders a recent proposal by A. Shaikh to tame Harrodian instability (Metroeconomica 2009), where besides the utilization gap investment depends on the expected growth of demand. His stability result has, however, been criticized as not credible. The crucial point is that Shaikh's continuous-time treatment does not distinguish between forward and backward derivatives. In order to check whether or not this poses a problem, several slight modifications of the model in continuous and discrete time are formulated and investigated for their stability. Roughly speaking, it is found that unless one assumes (myopic) perfect foresight, the destabilizing Harrodian mechanism continues to be effective.
This paper derives firms’ desired rate of utilization from an explicit maximization of a conjectured rate of profit at the micro level. Invoking a strategic complementarity, desired utilization is thus an increasing function of not only the profit share but also the actual utilization. Drawing on recent empirical material and a straightforward functional specification, the model is subsequently numerically calibrated. In particular, this ensures a unique solution for a steady-state position in which the actual and the endogenous desired rates of utilization coincide. On the other hand, it turns out that the anticipated losses of firms by not producing at the desired level are rather small. Hence there may be only weak pressure on them to close a utilization gap in the ordinary way by suitable adjustments in fixed investment. It is indicated that this finding may serve Kaleckian economists as a more rigorous justification for viewing their equilibria as pertaining to the long run, even if they allow actual utilization to deviate persistently from desired utilization.
The paper considers the dynamic adjustments of an average opinion index that can be derived from a microfounded framework where the individual agents switch between two kinds of sentiment with certain transition probabilities. The index can thus represent a general business climate, i.e., expectations about the future course of the economy. This approach is empirically tested with the survey expectations published by the ZEW and ifo institute. The estimated coefficients make economic sense and are highly significant. In particular, besides effects from fundamental data like the output gap in the recent past, one can identify a strong herding mechanism within both panels, such that the agents do not just join the majority but, metaphorically speaking, follow each single motion of the crowd. In addition, the transition probabilities of the ZEW agents are found to be influenced by the ifo climate but not the other way around.
The Keynesian stability condition is a necessary assumption for the IS equilibrium concept to make economic sense. With reasonable values for the saving parameter(s), however, it typically implies excessively strong multiplier effects. This is more than a cosmetic issue, not least because any simulation study of an otherwise ambitious model will thus be fraught with severe problems along some of its dimensions. The present paper demonstrates that by introducing proportional tax rates on production, corporate income and personal income, the multipliers will be considerably dampened. Within an elementary Kaleckian framework, it also advances a fairly satisfactory numerical calibration.
In (heterodox) economic theory, discussions of dynamic stability contrast negative with positive feedback effects. With more complex relationships, stable and unstable sub-models are set up, the intuition being that stability in an integrated model would be determined by the stronger forces. Accordingly, a combination of two stabilizing mechanisms will normally be expected to reinforce stability. The present paper gives a simple counter-example to this intuition, first in a purely formal reasoning and then illustrating it in a specific economic context. Regarding the latter, two approaches are considered that have recently been put forward in the literature to tame Harrodian instability: one by monetary policy acting through (indirect) interest-rate effects, and the other by an autonomously growing, non-capacity-creating component of aggregate demand, which gives rise to the so-called supermultiplier. While the two mechanisms separately stabilize the steady state if they are sufficiently strong, their interaction will necessarily render it unstable.
Reiner Franke and Boyan Yanovski
This note considers Tobin's average Q in a framework where firms finance investment by equities and debt. The determination of its long-run equilibrium value Q° is based on positing equality of the loan rate and, adjusted for a risk premium, the return on equities. Q° can thus be characterized as a ratio of two rates representing the somewhat modified interest costs and profits of the firms. The familiar benchmark value Q° = 1 obtains if another condition on the risk premium holds true, which may or may not be the case. An elementary numerical check demonstrates that possible deviations of Q° from unity are not overly dramatic.