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The Importance of the Retention Ratio in a Kaleckian Model with Debt Accumulation

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  • Hiroaki Sasaki
  • Shinya Fujita
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    Abstract

    Hein (2007) investigates the effects of debt of firms and interest rates on output and growth, and obtains the following three results. First, the long-run equilibrium is stable only if the short-run equilibrium is debt-led growth. Second, to obtain a positive long-run equilibrium value of the debt-capital ratio under the debt-led growth regime, extremely high interest rates are necessary. Third, the long-run equilibrium value of the rate of capital accumulation is increasing in interest rates and is independent of income distribution. However, these conclusions depend crucially on the assumption that the retention ratio of firms is equal to unity, and hence, that there is no dividend to shareholders. By relaxing the above assumption, we show in this paper that even the long-run equilibrium under the debt-burdened growth regime can be stable and that the long-run equilibrium value of the debt-capital ratio will be positive with plausible interest rates irrespective of whether the long-run equilibrium is debt-led growth or debt-burdened growth. Moreover, the effects of interest rates and income distribution on capital accumulation differ from regime to regime.

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    File URL: http://www.econ.kyoto-u.ac.jp/projectcenter/Paper/e-10-008.pdf
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    Bibliographic Info

    Paper provided by Graduate School of Economics Project Center, Kyoto University in its series Discussion papers with number e-10-008.

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    Length: 27 pages
    Date of creation: Nov 2010
    Date of revision:
    Handle: RePEc:kue:dpaper:e-10-008

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    1. Bhaduri, Amit & Marglin, Stephen, 1990. "Unemployment and the Real Wage: The Economic Basis for Contesting Political Ideologies," Cambridge Journal of Economics, Oxford University Press, vol. 14(4), pages 375-93, December.
    2. Hein, Eckhard & Schoder, Christian, 2009. "Interest rates, distribution and capital accumulation – A Post-Kaleckian perspective on the US and Germany," MPRA Paper 18223, University Library of Munich, Germany.
    3. Gilberto Tadeu Lima & Antonio J. A. Meirelles, 2004. "A Macrodynamics Of Debt Regimes, Financial Instability And Growth," Anais do XXXII Encontro Nacional de Economia [Proceedings of the 32th Brazilian Economics Meeting] 074, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    4. Eckhard Hein, 2005. "Interest, debt and capital accumulation - a Kaleckian approach," IMK Working Paper 05-2005, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    5. Sébastien Charles, 2008. "Teaching Minsky's financial instability hypothesis: a manageable suggestion," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 31(1), pages 125-138, September.
    6. Asada, Toichiro, 2006. "Stabilization policy in a Keynes-Goodwin model with debt accumulation," Structural Change and Economic Dynamics, Elsevier, vol. 17(4), pages 466-485, December.
    7. Eckhard Hein, 2008. "Shareholder value orientation, distribution and growth – short- and medium-run effects in a Kaleckian model," Department of Economics Working Papers wuwp120, Vienna University of Economics, Department of Economics.
    8. Eckhard Hein & Till Van Treeck, 2010. "Financialisation and Rising Shareholder Power in Kaleckian/Post-Kaleckian Models of Distribution and Growth," Review of Political Economy, Taylor & Francis Journals, vol. 22(2), pages 205-233.
    9. Eckhard Hein, 2004. "Interest rate, debt, distribution and capital accumulation in a post-Kaleckian model," Macroeconomics 0412005, EconWPA.
    10. Lavoie, M., 1993. "Interest Rates in Post-Keynesian Models of Growth and Distribution," Working Papers 9314e, University of Ottawa, Department of Economics.
    11. Sébastien Charles, 2008. "Corporate debt, variable retention rate and the appearance of financial fragility," Cambridge Journal of Economics, Oxford University Press, vol. 32(5), pages 781-795, September.
    12. Mark Setterfield, 2009. "Macroeconomics without the LM curve: an alternative view," Cambridge Journal of Economics, Oxford University Press, vol. 33(2), pages 273-293, March.
    13. Sébastien Charles, 2010. "Explaining persistent cycles in a short-run context: firms' propensity to invest and omnipotent shareholders," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 32(3), pages 409-426, April.
    14. Sebastien Charles, 2008. "A Post-Keynesian Model of Accumulation with a Minskyan Financial Structure," Review of Political Economy, Taylor & Francis Journals, vol. 20(3), pages 319-331.
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