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This paper analyses the relevance of the
Cambridge equation in the presence of government when the assumption
of fixed savings is relaxed. We consider an intertemporal
representative agent model with Pasinettian features. The results
are: (i) the equilibrium distribution of income between wages and
profits, as stated by the Cambridge equation, is not affected by the
occurrence of sustained deficits or surpluses, (ii) the rate of
profit is not determined by the Cambridge equation, and (iii) only
taxation on profits affects the profit rate and, as a consequence,
capital accumulation, wages, and output. |