Fiscal policy as a long-run stabilization tool. Simulations with a stock-flow consistent model

Mario Cassetti

No PKWP2003, Working Papers from Post Keynesian Economics Society (PKES)

Abstract: This study examines the real and financial requirements of a regularly progressive economy driven by an autonomous evolution of public expenditure. The proposed model attempts to reconcile features of Kaleckian, Sraffian and horizontalist strands of post-Keynesian economics in a stock-flow consistent framework, which includes a banking sector and a central bank, as well as workers, rentiers,and firms. It focuses on the long-run convergence to a normal capacity utilization rate in a credit economy, where money is endogenous and the interest rate is kept stable by the central bank. The results show that an increase in public expenditure aimed at stabilizing economic activity on a higher long-run trend does not face significant financial constraints. However, the expansion may result in inflation and changes in the income distribution. Furthermore, resolving the conflict between robust steady growth and tolerable inflation rests on political and institutional changes, rather than on tightening fiscal and monetary policies. Rentiers and the financial sector have good reasons to resist expansionary fiscal policies, given the relative decline in the real value of their financial rents and activities caused by inflation and by improvements in the income share of wage earners.

Keywords: Fiscal policy; Public debt; Income distribution; Supermultiplier; Kaleckian growth models; Stock-flow consistent models (search for similar items in EconPapers)
JEL-codes: E11 E12 E20 E25 E60 (search for similar items in EconPapers)
Pages: 37
Date: 2020-01
New Economics Papers: this item is included in nep-mac and nep-pke
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