Income Distribution, Consumption Dynamics, and Financial Fragility: A Kaleckian Perspective

This paper develops and empirically evaluates a Kaleckian model of distributive conflict in which mark-up pricing generates a divergence between wages and prices, eroding workers’ real purchasing power and inducing debt-financed consumption. In contrast to neoclassical frameworks, prices are administratively set by firms under imperfect competition, while workers adjust to distributive losses through borrowing and the accumulation of bank deposits. The model for- malizes workers’ consumption behavior as a real, dynamic process, highlighting a martingale-like condition in which households smooth real consumption over time despite inflationary pressures arising from rising mark-ups. Using household-level panel data, the paper tests this martingale property by estimating a fixed-effects regression of real consumption on its lagged value and lagged financial resources. The results provide evidence that real consumption exhibits strong persistence, consistent with consumption smoothing, while debt plays a compensatory role in sustaining demand under declining wage shares, the analysis also shows that this mechanism is inherently unstable, as rising indebtedness eventu- ally leads to deleveraging, contraction in effective demand, and downward pressure on prices. The findings contribute to the Post-Keynesian literature by linking distributive conflict, household debt, offering new empirical insights into the dynamics of consumption and macroeconomic instability.