International Trade and Finance: A North American Perspective

By Khosrow Fatemi | Go to book overview

5
THE ROLE OF INDEBTEDNESS IN THE CIRCUIT OF CAPITAL: ITS IMPACT ON INFLATION AND INCOME DISTRIBUTION

JEAN-GUY LORANGER


INTRODUCTION

The aim of this chapter is to show how a macrodynamic equation of the circuit of capital is compatible with a macromodel containing a structural price equation, based on the markup approach and two other equations associated with two key financial variables: the exchange rates and the interest rate. This new formulation of the price equation is important since it will be at the heart of a new explanation of inflation presented elsewhere. 1

In the first part of this chapter, Marx's circuit of capital with credit money will be reviewed. Then, by following Foley's approach, a dynamic model of the circuit will be formulated with discrete time lags. 2

The second part will be devoted to the analysis of the logical properties of three explanatory variables of the circuit equation: price, exchange rates, and interest rates. A four-equation model will be built and an application will be made to the study of the austerity policy adopted by the Central Bank of Canada since 1975. A link will also be made between the circuit and the markup approach.

Finally, the third part is an application of this circuit approach to the Mexican economy, where it is assumed that the crisis in the external sector is at the origin of a major crisis of confidence and has had serious consequences on the distribution of income outside the region.


INDEBTEDNESS AND THE CIRCUIT OF CAPITAL

Although the circuit approach has been developed in recent years by post- Keynesians from Keynes' conception of a monetary economy of production, 3 radical economists like Duncan Foley have preferred to adhere to

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