Monetary Policy Under Steindlian Mark-up Dynamics

We formulate a macrodynamic model of interaction between a post-Keynesian investment function with endogenous capacity utilization and pro-cyclical mark-up over wage costs in a demand-constrained closed economy. The main objective of the study is to examine whether, in the absence of effective collective bargaining by the workers, monetary policy can resolve class conflict and maintain social stability. We consider a modified version of the counter-cyclical Taylor-type interest-rate rules that targets income distribution through the rate of capacity utilization. We explore the extent to which a combination of pro-cyclical mark-up dynamics and counter-cyclical interest-rate rules can stabilize potentially unstable investment dynamics. We also examine the effectiveness of monetary policy in the form of interest-rate rules in stabilizing output and income distribution.