Testing the Goodwin growth-cycle macroeconomic dynamics in Brazil

TL;DR

This paper empirically tests Goodwin's macroeconomic growth-cycle model using Brazilian income distribution data modeled by Gompertz-Pareto distribution, revealing partial agreement and highlighting areas for model improvement.

Contribution

It extends Goodwin's model by incorporating Brazilian income distribution data and evaluates its empirical validity from 1981 to 2009.

Findings

Partial qualitative and quantitative agreement with the models

Original Goodwin model fits data better than the extension

Both models predict cycles not observed in actual data

Abstract

This paper discusses the empirical validity of Goodwin's (1967) macroeconomic model of growth with cycles by assuming that the individual income distribution of the Brazilian society is described by the Gompertz-Pareto distribution (GPD). This is formed by the combination of the Gompertz curve, representing the overwhelming majority of the population (~99%), with the Pareto power law, representing the tiny richest part (~1%). In line with Goodwin's original model, we identify the Gompertzian part with the workers and the Paretian component with the class of capitalists. Since the GPD parameters are obtained for each year and the Goodwin macroeconomics is a time evolving model, we use previously determined, and further extended here, Brazilian GPD parameters, as well as unemployment data, to study the time evolution of these quantities in Brazil from 1981 to 2009 by means of the Goodwin dynamics. This is done in the original Goodwin model and an extension advanced by Desai et al. (2006). As far as Brazilian data is concerned, our results show partial qualitative and quantitative agreement with both models in the studied time period, although the original one provides better data fit. Nevertheless, both models fall short of a good empirical agreement as they predict single center cycles which were not found in the data. We discuss the specific points where the Goodwin dynamics must be improved in order to provide a more realistic representation of the dynamics of economic systems.