Central bank activity, the Goodwin pattern, and secular decline in the wage share

In this paper, we present an alternative to the conventional view regarding the Goodwin pattern. We demonstrate that the Goodwin pattern emerges from a three-dimensional system of real, monetary, and distributional dynamics where the monetary linkage includes a central bank incorporating an asymmetric reaction function. The asymmetric reaction function is the result of a central bank that is inflation averse resulting in a deflationary bias. Therefore, the central bank sets interest rates in response to variations in the wage share and real activity, however, there is no influence of distribution on real activity. In our model, the central bank reaction function reflects implicit inflation targeting in real activity × wage share space responding to goods market and labour market pressure. In other words, the central bank finds itself in a conflicting claims environment, changing interest rates when either output or the wage share deviate from their target values. Our results show that the introduction of the central bank reaction function with a deflationary bias produces the cyclical behavior associated with the Goodwin pattern, but more importantly, it also demonstrates a weakening of the profit squeeze mechanism and a secular decline in the wage share.