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Wage-led, debt-led growth in an open economy*

Esteban Pérez Caldentey and Matías Vernengo

Keywords: wage-led growth; investment; external constraint

We argue that a fundamental difference between the various post-Keynesian approaches to economic growth lies in their treatment of investment. Neo-Kaleckian models, which are more appropriately Robinsonian models, postulate an investment function dependent on profitability, and that is partly autonomous from income. Some of these models rely on the importance of profitability, captured by the profit share, to make the case for profit-led growth. For their part, Kaldorian models, which are in our view compatible with Sraffian models, place the emphasis on the accelerator in the determination of investment. More importantly, since investment is a derived demand, that is, ruled by the adjustment of capacity to autonomous demand, there is a tendency to a normal level of capacity utilization. These are supermultiplier models. In our view the Kaldorian approach is better equipped to deal with some of the issues relating income distribution to accumulation with effective demand in an open economy in the long run. We develop an open economy model to examine the conditions under which an increase in real wages can produce wage-led growth, showing that the limit to wage-led expansion is a binding external constraint. The model is unique in emphasizing the role of income distribution in affecting real exchange rates, and it is through this channel that the ambiguous effects of income distribution on growth arise. We also provide some evidence indicating that real wages are positively related to growth, investment, and capacity utilization, and we highlight the role of finance in sustaining expansions suggesting that debt-led growth should not be identified with profit-led growth.

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