On the Over-determination Problem in a Two Sector Neo-Kaleckian Model

CSWP 56 (July 2022)

Author Biao Huang

Keywords two-sector neo-Kaleckian model; equalised profit rate; mark- up pricing; free competi-tion

JEL B51; O41; E11

In this paper, we aim to solve the over-determination problem in two-sector neo-Kaleckian models raised by Park (1995) against Dutt (1990). After summarising the over-determination problem and existing solutions, we argue that the over-determination problem is not caused by the incompatibility of sectors’ investment functions and equalised rates of profit, but rather the incompatibility of profit rate equalisation and the arbitrarily given mark-up rates of different sectors. We propose to solve the problem by introducing an endogenous variable, the relative mark-up ratio, which makes the model perfectly determined and more logically consistent. We also discuss the adjustment mechanism from the short-run to the long-run equilibrium.

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