A Kaleckian model with intermediate goods

This paper is a contribution to post-Keynesian theory, but it takes inspiration from Sraffian critiques. It shows that when intermediate consumption – an essential feature of modern economies – is taken into account in a minimal way, the resulting post-Keynesian model can be usefully applied to OECD countries.

From the abstract:
Kaleckian models are widely used for macroeconomic analysis due to their flexibility and simplicity. Sraffians counter that the Kaleckian model fails to capture a central fact of modern economies, the existence and importance of intermediate consumption. The critique is correct, but as the remedy appears to be a detailed analysis with multi-sectoral input-output tables, Sraffian models have not displaced their more tractable Kaleckian counterparts.

This paper presents a model with intermediate consumption that is Kaleckian in spirit, although prompted by the Sraffian critique. It is shown that the profit share of GDP can be decomposed into two factors, an average profit share at firm level and a factor capturing intermediate goods consumption. The corresponding firm-level markups for a sample of 14 OECD countries cluster closely around a common value that remains steady when averaged over business cycles.

Taking this as evidence that the factorization is empirically meaningful, the paper then constructs a modified Kaleckian model. Using the modified model it is shown that economies are always profit-led with respect to a change in intermediate consumption, but may be either profit-led or wage-led with respect to a change in the firm-level markup, opening the possibility for diverse trajectories over business cycles. The model is applied to France, which has a particularly long data series, and is shown to perform well in explaining changes in utilization rates.

Read the article (external link to MPRA)