ENDOGENOUS BANKING MARKUP, DISTRIBUTIONAL CONFLICT AND CAPACITY UTILIZATION Gilberto Tadeu Lima and Antonio J. A. Meirelles* University of São Paulo and State University of Campinas, Brazil ABSTRACT We develop a post-Keynesian macrodynamic model of productive capacity utilization and income dis- tribution in which the supply of credit-money is endogenous. Nominal interest rate is set by banks as a markup over the base rate, which is exogenously determined by the monetary authority. Over time, banking markup falls with firms’ profit rate on physical capital and rises with the rate of inflation, whereas the base rate remains unchanged. The dynamic behaviour of the system is analysed for both cases regarding capacity utilization, namely full utilization and excess capacity, which then makes for the possibility of multiple equilibria for the state variables real wage and nominal interest rate. 1. INTRODUCTION In this paper we develop a post-Keynesian dynamic macromodel of produc- tive capacity utilization, distribution and conflict inflation, in which the supply of credit-money is endogenous. Nominal interest rate is determined by banks as a markup over the base rate, which is set by the monetary author- ity. Over time, banking markup falls with firms’ profit rate on physical capital and rises with the inflation rate, whereas the base rate varies exogenously. A rise in the profit rate on physical capital raises firms’ ability to serve out- standing financial obligations, lowers their perceived risk of default and therefore leads to a fall in the banking markup. In turn, a rise in the infla- tion rate raises the banking markup by leading banks to require a higher risk premium on their loans. Metroeconomica 54:2 & 3 (2003) 366–384 © Blackwell Publishing Ltd 2003, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. * An earlier version of this paper was presented at the conference entitled Old and New Growth Theories: An Assessment, held in Pisa, Italy, 5–7 October 2001. We would like to thank, without implicating, conference participants (and in particular Nelson Barbosa-Filho, Amitava Dutt and Eckhard Hein), Marc Lavoie and two anonymous referees for their quite helpful comments and/or suggestions on earlier drafts. Research funding from the Brazilian National Council of Scientific and Technological Development (CNPq) is gratefully acknowledged as well.