Endogenous Banking Markup, Distributional Conflict and Capacity Utilization

Abstract

We develop a post‐Keynesian macrodynamic model of productive capacity utilization and income distribution in which the supply of credit‐money is endogenous. Nominal interest rate is set by banks as a markup over the base rate, which is exogenously determined by the monetary authority. Over time, banking markup falls with firms’ profit rate on physical capital and rises with the rate of inflation, whereas the base rate remains unchanged. The dynamic behaviour of the system is analysed for both cases regarding capacity utilization, namely full utilization and excess capacity, which then makes for the possibility of multiple equilibria for the state variables real wage and nominal interest rate.

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