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The Trouble with Harrod: The fundamental instability of the warranted rate in the light of the Sraffian Supermultiplier

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  • Franklin Serrano
  • Fabio Freitas
  • Gustavo Bhering

Abstract

The paper argues that Harrodian instability is an instance of what Hicks in his book Capital and Growth (1965) called static instability, related to the direction (and not to the intensity) of the disequilibrium adjustment process. We show why such instability obtains in demand‐led growth models in which the ratio of capacity creating private investment to output ratio is given exogenously by the aggregate marginal propensity to save. We also show that Sraffian Supermultiplier model overcomes the Harrodian instability and that its demand‐led equilibrium is statically stable. It is explained that the latter results do not follow from the presence of autonomous non‐capacity creating expenditure component as such but from its presence within a model in which investment is driven by the capital stock adjustment principle (i.e., the flexible accelerator). Finally, we argue that, although being statically stable, the equilibrium growth path of the Sraffian Supermultiplier model can be dynamically stable or unstable depending on the intensity of the reaction of investment to demand. We then provide a discrete time sufficient condition for the dynamic stability of such equilibrium that implies that the marginal propensity to invest remains lower than the marginal propensity to save during the adjustment process, a modified Keynesian stability condition.

Suggested Citation

  • Franklin Serrano & Fabio Freitas & Gustavo Bhering, 2019. "The Trouble with Harrod: The fundamental instability of the warranted rate in the light of the Sraffian Supermultiplier," Metroeconomica, Wiley Blackwell, vol. 70(2), pages 263-287, May.
  • Handle: RePEc:bla:metroe:v:70:y:2019:i:2:p:263-287
    DOI: 10.1111/meca.12230
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    Cited by:

    1. Giuseppe Orlando & Fabio Della Rossa, 2019. "An Empirical Test on Harrod’s Open Economy Dynamics," Mathematics, MDPI, vol. 7(6), pages 1-13, June.
    2. Guilherme Haluska & Julia Braga & Ricardo Summa, 2021. "Growth, investment share and the stability of the Sraffian Supermultiplier model in the U.S. economy (1985–2017)," Metroeconomica, Wiley Blackwell, vol. 72(2), pages 345-364, May.
    3. Ettore Gallo, 2022. "When is the long run?—Historical time and adjustment periods in demand‐led growth models," Metroeconomica, Wiley Blackwell, vol. 73(4), pages 1155-1178, November.
    4. Reiner Franke, 2022. "A methodological problem in a supermultiplier model with too much acceleration," Metroeconomica, Wiley Blackwell, vol. 73(1), pages 93-108, February.
    5. Summa, Ricardo de Figueiredo, 2022. "Alternative uses of functional finance: Lerner, MMT and the Sraffiansh," IPE Working Papers 175/2021, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    6. Peter Skott & Júlio Fernando Costa Santos & José Luís da Costa Oreiro, 2022. "Supermultipliers, ‘endogenous autonomous demand’ and functional finance," Metroeconomica, Wiley Blackwell, vol. 73(1), pages 220-244, February.
    7. Barbieri Góes, Maria Cristina & Deleidi, Matteo, 2022. "Output determination and autonomous demand multipliers: An empirical investigation for the US economy," Economic Modelling, Elsevier, vol. 116(C).
    8. Eric Kemp‐Benedict, 2020. "Convergence of actual, warranted, and natural growth rates in a Kaleckian–Harrodian‐classical model," Metroeconomica, Wiley Blackwell, vol. 71(4), pages 851-881, November.
    9. Stephen Thompson, 2022. "“The total movement of this disorder is its order”: Investment and utilization dynamics in long‐run disequilibrium," Metroeconomica, Wiley Blackwell, vol. 73(2), pages 638-682, May.

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