Supply and demand in Kaldorian growth models: a proposal for dynamic adjustment

This paper analyses the dynamic adjustment of supply and demand in Kaldorian growth models. We discuss how the growth rate of a country, given by demand constraints, adjusts towards the growth rate given by the supply-side, and vice-versa, presenting the necessary conditions and empirical plausibility for these adjustments. The Palley-Setterfield approach brings a possible reconciliation to supply- and demand- long-term growth rates. However, this approach have some important empirical drawbacks, and we raise many considerations about the labour market in order to capture their analysis in a common framework. In this sense, we draw from the criticism developed by McCombie, and synthetize his view in terms of complete endogeneity, in a way in which employment adjusts immediately to guarantee equilibrium between supply and demand. The main contribution of the paper is to propose a theoretical reconciliation between the Palley-Setterfield and the McCombie approaches, presenting an initially simple model focused in a labour market adjustment, in which both types of adjustments represent extreme cases. We also discuss the theoretical possibility and the characteristics of hysteresis effects that lead to intermediate cases