Demand regimes and income distribution reconsidered in an open economy portfolio balance framework

Arslan Razmi

Journal of Post Keynesian Economics, 2016, vol. 39, issue 4, 516-538

Abstract: A large body of neo-Kaleckian literature has debated the distributional determinants of demand and growth. One general conclusion has been that open economy considerations weaken the potential for a wage-led growth regime. However, this literature has largely ignored asset portfolio considerations and the stock and flow interactions that result from the feedback from savings to wealth and from wealth to the current account. This study develops a theoretical framework that specifies a fuller system of (instantaneous) flow equilibria embedded in a medium-run framework with stable steady-state stocks of real and financial assets. The balance-of-payments constraint that results ensures that simply raising the wage does not yield a higher stock of real capital. A lower markup may increase the steady-state stock of capital but only through the relative price channel. These results are much stronger than those derived in the existing literature, and more important, emerge regardless of whether the demand regime is wage-led or profit-led in the absence of international trade.

Date: 2016
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DOI: 10.1080/01603477.2016.1221317

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