Since the stability condition of

Since σ∈(0, 1), the stability condition of the equilibrium capacity utilisation is s(1−α2)(1−σ)−α1>0. Given that u∈(0, 1), we must also assume g0>αsiλ2. Other things held constant, from Eq. (15), the partial effect of a change in the TAPI-1 interest rate, in the debt-capital ratio and in the wage share on the equilibrium capacity utilisation is The impact of a raising base interest rate or debt-capital ratio on the equilibrium capacity utilisation, Eqs. (16a) and (16b) respectively, is negative and unambiguously signed. It means that an increase in the debt-service from firms to rentiers, due to either raising interest or the stock of debt relative to the total physical capital, reduces capacity utilisation and consequently the retained profits of firms. The partial differential (16c), in turn, shows that an increased wage share affects positively the equilibrium capacity utilisation u*. It follows from Eqs. (4) and (16a)–(16c) that the partial effects of a rising base interest rate, debt-capital ratio or wage share in income on the equilibrium profit rate is and . In the neo-Kaleckian model it is assumed , that is, an increasing wage share raises the equilibrium profit rate. The short-run equilibrium rate of capital accumulation, g*, can be obtained by substituting Eqs. (15) and (4) into either (9) or (14) From Eq. (17) we also obtain , and .
The long-run analysis Further, in the long run it is assumed that the short-run equilibrium values of the variables always hold. In Section 4.1 the long-run dynamics of the economy will be examined through the behaviour of two short-run variables over time, namely, the wage share in income σ and the capital-effective labour supply ratio, i.e. k=K/(Na), where N is the labour supply of the economy. In subsection 4.2 the financial dimension will be added to the analysis.
Concluding remarks The three-dimensional model, on the other hand, relaxes the hypothesis of a constant λ, which implies that a rising debt service changes the debt structure of firms and hence affects the dynamic behaviour of capital accumulation and income distribution over time. The analysis of equilibrium solution of the 3×3 dynamical system through the Routh-Hurwitz Criteria shows how the economy becomes potentially more unstable when we allow for variations of the debt of firms as a proportion of their capital stock into the model. Unlike the 2×2 dynamical system, the three-dimensional model also formally demonstrates that a sufficiently high base interest rate increases the financial fragility of the economy, which leads to weaker investments and redistribution of income in favour of financial capitalists. Such a conclusion is particularly relevant to understand why central banks of developing countries with relatively high base interest rates might have limited space to conduct a contractionary monetary policy through open market operations, as any increase in the interest rate might be enough to drag the economy into a financially unstable scenario of rising indebtedness, decreasing investment, and growing income inequality.
Introduction The core argument in the “standard” cumulative causation model is about the existence of feedback processes which reinforces the initial conditions (Veblen, 1915; Myrdal, 1957; Kaldor, 1966, 1970). Kaldor developed the idea of the cumulative growth which can be represented by the Kaldor–Verdoorn Law. His argument was that growth is demand led and, in particular, export led. This theoretical approach is represented by exported-led cumulative causation models (ELCC). The cumulative mechanism was first formalized by Dixon and Thirlwall (1975a) and the pioneer work of Thirlwall (1979) introduced the standard balance-of-payments-constraint growth model (BPCG). Based on the Kaldor–Dixon–Thirlwall framework it is introduced a new role for the Real Exchange Rate (RER) in the traditional BPCG in this paper. In the post-Keynesian literature the relationship between the RER and economic growth has been largely neglected. In the traditional BPCG framework changes in the real exchange rate are assumed to be irrelevant for long-term growth, since some empirical evidences present either that price elasticities of exports and imports are low, meaning that the impact of a real exchange rate devaluation on the growth rate of exports and imports is small, or that terms of trade do not show a systematic trend of appreciation or depreciation in the long run (McCombie and Roberts, 2002, p. 92). Notwithstanding, new evidences emphasize the important role of competitive RER in relaxing the balance of payment constraint on growth.