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This study analyses the interaction of demand, income distribution, and natural output level in a dynamic Kaleckian model with output hysteresis. Hysteresis means that the natural output level depends on the path of the demand-driven actual output level. We consider wage-led and profit-led demand regimes and goods market-led and labour market-led income distribution regimes. We find that the stability of the steady state is closely related to hysteresis in certain regimes. Limit cycles can arise when the strong flexibility of either prices or wages to the output gap is combined with a moderate degree of natural output hysteresis. We make the persuasive case that a Kaleckian model with a wage-led demand regime and anticyclical profit share is less unstable and that pseudo-Goodwin cycles can arise in the profit-led demand regime with a procyclical profit share.
Keywords: Hysteresis, Natural output level, Demand regime, Income distribution
JEL classification: D33 E12 E32