Worker household debt, functional income distribution and growth: A neo‐Kaleckian perspective

Abstract

AbstractIn a stock‐flow consistent neo‐Kaleckian macro‐model, along with worker households' debt dynamics, we incorporate distributional dynamics and examine the dynamic stability of the economy in the long‐run. Both wage‐led and profit‐led but a debt‐burdened demand and growth regimes are possible in the short‐run and the long‐run. We show that the interaction between the debt and distributional dynamics may lead to instability in the economy. We find that a rise in the targeted profit share of firms or an increase in the bargaining power of firms vis‐à‐vis workers may cause a deterioration in functional income distribution. We show that a fall in animal spirits leads to a decline in functional income distribution vis‐à‐vis workers and may also lead to a fall in capital accumulation rate in the long‐run.