Supply and Demand in Kaldorian Growth Models: A Proposal for Dynamic Adjustment

Guilherme R. Magacho and Danilo Spinola

Review of Political Economy, 2024, vol. 36, issue 4, 1613-1634

Abstract: This article analyses the dynamic adjustment of supply and demand in Kaldorian growth models. We discuss how the growth rate of a country, given by demand constraints, adjusts towards the growth rate given by the supply-side, and vice versa, and present the necessary conditions and empirical plausibility for these adjustments. The Palley–Setterfield approach allows for a possible reconciliation between supply and demand long-term growth rates. However, this approach has some important empirical drawbacks, and we identify many considerations about the labour market in order to capture their analysis in a common framework. In this sense, we draw from the criticism developed by McCombie, and synthetize his view in terms of complete endogeneity, in a way in which employment adjusts immediately to guarantee equilibrium between supply and demand. The main contribution of this article is to propose a theoretical reconciliation between the Palley–Setterfield and the McCombie approaches, presenting an initially simple model focused on a labour market adjustment, in which both types of adjustment represent extreme cases. We also discuss the theoretical possibility and the characteristics of hysteresis effects that lead to intermediate cases.

Date: 2024
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Related works:
Working Paper: Supply and demand in Kaldorian growth models: a proposal for dynamic adjustment (2021)
Working Paper: Supply and demand in Kaldorian growth models: a proposal for dynamic adjustment (2020)
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DOI: 10.1080/09538259.2022.2139597

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