A SFC political business cycle: Kalecki’s 1943 model revisited

This paper features a stock-flow consistent (sfc) political business cycle model where the interplay between financial debt, income distribution and fiscal policy is politically mediated by the relative influence of workers and businesses over government policy and publicly provided goods. In countries where taxes are a politically costly alternative to generate fiscal revenue, debt finances fiscal expansionary activity to initially raise wages and increase output. However, institutional mechanisms keep such drivers in check, and prompt a stop-and-go cycle as Kalecki suggested in his landmark 1943 paper. We find that the push of labor interests against business stakeholders leads to non-linear dynamics over debt, deficits and long-term growth paths.