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Cambridge Journal of Economics Advance Access originally published online on June 6, 2005
Cambridge Journal of Economics 2006 30(2):201-217; doi:10.1093/cje/bei056
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© The Author 2005. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

Article

The financial system and the Pasinetti theorem

Man-Seop Park*

* Korea University, Korea

Address for correspondence: Department of Economics, Korea University, 1 Anam-Dong, Sungbuk-Gu, Seoul 136-701, Korea; email: manseop{at}korea.ac.kr

Abstract

Palley (Inside debt, aggregate demand, and the Cambridge theory of distribution, Cambridge Journal of Economics, vol. 20, no. 4, 465–74, 1996; Financial institutions and the Cambridge theory of distribution, Cambridge Journal of Economics, vol. 26, no. 2, 275–7, 2002) considers the Pasinetti theorem in the context of the credit money system where banks generate debts endogenously, and claims that the theorem ceases to hold in such a system, being valid only in the loanable funds system. This paper traces the root of Palley's claim to his assumption regarding the ownership of banks, sets out an alternative (more realistic) ownership arrangement, and thereby restores the Pasinetti theorem unscathed in the credit money system (at least in the kind Palley must have considered). The paper, however, uncovers the case where the theorem indeed collapses and discusses the reason for it: the hoarding of a non-interest-bearing asset.

Key Words: Credit money system • Loanable funds system • Pasinetti theorem

JEL classifications: B5, E12

Manuscript received November 14, 2003; final version received April 1, 2005.


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