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

Abstract

In 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.