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

  


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