The principle of effective demand under modern finance: An exploration in the traditions of Kalecki and Keynes

Abstract

The paper explores the principle of effective demand in the context of modern financialization. The traditional ?two-sector? model is extended to include banking and finance sectors to examine the implications of the interaction between real and financial sector for effective demand in a closed economy. The analytical framework developed in the paper provides an intuitive understanding of the problem of effective demand in the investment led and consumption led regimes under financialization. It also brings out the underlying dynamics in terms of transfer of profit between the sectors that renders macroeconomic vulnerability in these regimes.