Demand-driven inequality, endogenous saving rate and macroeconomic instability

Abstract

This article examines consumption dynamics in a Cambridge model of growth and distribution. The model endogenises the workers' saving rate and incorporates out-of-equilibrium dynamics explicitly. The analysis identifies a new mechanism of macroeconomic instability that emerges from the interaction between the Kaldorian process of demand-driven inequality and the workers' saving behaviour. The mechanism can generate perpetual cycles where the upwards phase is characterised by a prolonged period of falling saving rate and increasing income inequality. The article discusses the empirical relevance of the formal analysis. The article discusses the empirical relevance of the analytic results.