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Investment, Autonomous Demand and Long Run Capacity Utilization: An Empirical Test for the Euro Area

Ettore Gallo ()

No 1904, Working Papers from New School for Social Research, Department of Economics

Abstract: This paper reviews and empirically tests the validity and policy conclusions of the Sraffian Supermultiplier model (SSM) and the modified Neo-Kaleckian model after the inclusion of autonomous components of aggregate demand. First, we theoretically assess whether the SSM may constitute a complex variant of the Neo-Kaleckian model. In this sense, it is shown that results compatible with the SSM can be obtained by implementing a set of mechanisms in a modified Neo-Kaleckian model. Second, the paper empirically tests the main implications of the models in the Euro Area, based on Eurostat data. In particular, the discussion outlines the short and long-run relation between autonomous demand and output, by testing cointegration and causality with a VECM model. Moreover, the role accounted by both theories to the rate of capacity utilization is empirically assessed, through a time-series estimation of the Sraffian and Neo-Kaleckian investment functions. While confirming the theoretical relation between autonomous demand and output in the long run, the results show that capacity utilization still plays a key role in the short-run adjustment mechanism. Therefore, admitting that Keynesian results may hold even after the traverse, our work suggests to be Kaleckian in the short run and Sraffian in the long run.

Keywords: Distribution; effective demand; Eurozone; growth; Neo-Kaleckian; Sraffian; Supermultiplier (search for similar items in EconPapers)
JEL-codes: B51 E11 E12 O41 O47 O52 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2019-05
New Economics Papers: this item is included in nep-eec, nep-gro, nep-hme, nep-mac and nep-pke
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http://www.economicpolicyresearch.org/econ/2019/NSSR_WP_042019.pdf First version, 2019 (application/pdf)

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