Autonomous expenditures and induced investment: a panel test of the Sraffian supermultiplier model in European countries

This paper tests the main postulates of the Sraffian supermultiplier model for the case of 16 European economies during the period 1995-2018. We adopt the methodology of Girardi and Pariboni (2016) and extend it to a panel framework. We apply panel unit root, cointegration, and causality tests that are robust to endogenous regressors, cross-sectional dependence and heterogeneity across countries. Our results are supportive of the Sraffian supermultiplier model. In a heterogeneous panel framework, autonomous demand and output follow a long-run equilibrium relationship and there exists panel long-run causality that goes unidirectionally from autonomous demand to output. We also empirically verify the investment accelerator (the mechanism that enables the dynamic stability of the model) by confirming the existence of same-sign panel causality running unidirectionally from the growth rate of autonomous demand to the investment share. Our results call for national economic policies aimed at promoting the components of autonomous demand that act as locomotives of growth in each country.