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The Paradox of Thrift in the Two-Sector Kaleckian Growth Model

Fanti, Lucrezia and Zamparelli, Luca (2020): The Paradox of Thrift in the Two-Sector Kaleckian Growth Model.

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Abstract

We analyze the paradox of thrift in a two-sector Kaleckian growth model. We consider an economy with one consumption and one investment good, differential sectoral mark-ups, and profit rates equalization. We show that when the investment function depends on aggregate capacity utilization and on the aggregate profit share (the Bhaduri-Marglin investment function) the paradox of thrift in its growth version may fail if mark-ups are higher in the investment good sector. In this case, the reduction in the saving rate produces a reallocation of economic activity towards the investment good sector; the aggregate profit share rises and its positive effect on investment may offset the reduction in average capacity utilization if investment is relatively more sensitive to profitability than to the level of activity.

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