Theory of the shifting modes of reproduction: Where do the non-nuetrality of money and economic cycles come from?

Abstract

The theory of switching modes of reproduction (SMR) is a relatively new branch of heterodox macroeconomic theory. The SMR-models have two distinctive properties: they allow endogenous economic cycles and posess non-neutrality of money in the long term. The latter property means that in the SMR-models monetary expansion can effectively stimulate economic growth. The original form of the SMR-models (a complicated system of differential equations) makes them difficult for general theoretical analysis. In this article I propose a simpler version of the SMR-model in discrete time, for which, under certain assumptions, an explicit closed-form solution is derived. I use a formalism that is close to that accepted in the macroeconomic mainstream. All key structural features of the original SMR-model were retained, and the constructed model has the two properties mentioned. The model is used to identify particular assumptions that lead to existence of fluctuations and non-neutrality of money. It is shown that endogenous fluctuations are associated with very specific and not entirely realistic assumptions about the process of formation and depreciation of fixed capital. It is also revealed that the non-neutrality of money in the SMR-theory arises from the assumption that financial constraints are the only constraints of the investment process. Equivalently, this assumption can be re-formulated as a postulate of the unlimited labor supply with the exceptional ability of monetary expansion to employ it. If we adjust the model by adding the condition of limited labor supply, then money becomes neutral, and monetary stimulus loses its effectiveness. Based on the findings, the recommendation to rely on monetary easing in order to accelerate economic growth which is advocated by the authors of the original SRM-theory is called into question.