The Importance of the Retention Ratio in a Kaleckian Model with Debt Accumulation

Hein (2007) investigates the effects of debt of firms and interest rates on output and growth, and obtains the following three results. First, the long-run equilibrium is stable only if the short-run equilibrium is debt-led growth. Second, to obtain a positive long-run equilibrium value of the debt-capital ratio under the debt-led growth regime, extremely high interest rates are necessary. Third, the long-run equilibrium value of the rate of capital accumulation is increasing in interest rates and is independent of income distribution. However, these conclusions depend crucially on the assumption that the retention ratio of firms is equal to unity, and hence, that there is no dividend to shareholders. By relaxing the above assumption, we show in this paper that even the long-run equilibrium under the debt-burdened growth regime can be stable and that the long-run equilibrium value of the debt-capital ratio will be positive with plausible interest rates irrespective of whether the long-run equilibrium is debt-led growth or debt-burdened growth. Moreover, the effects of interest rates and income distribution on capital accumulation differ from regime to regime.