Distribution and growth. A dynamic approach

This paper studies the effects of an (exogenous) distributional shock on accumulation and growth. We develop a model that studies the dynamics of demand, profits and investment following a change of the nominal wage-rate, which is not accompanied by a simultaneous proportional change of prices to maintain the initial distribution of income. The initial income distribution, however, is eventually restored through a gradual adjustment of prices to the new level of the nominal wage-rate. We concentrate on the process of transition from the initial to a new equilibrium and consider both cases in which the process of transition is ‘wage-led’ and case in which it is ‘profit-led’. In all cases, the dynamics of the economy is crucially affected by the firms’ initial response to the shock and it is path-dependent.