In 1962, Luigi Pasinetti published a model of the "Cambridge theory of income distribution" that corrected a "logical slip" in Nicholas Kaldor's earlier formulation of the problem. Pasinetti's model included two stocks of capital instead of one, avoided Kaldor's assumption that the workers' marginal propensity to save was zero, and demonstrated that on a balanced growth path the rate of profit depends only on the growth rate of the labor force and the capitalists' marginal propensity to save (the "Pasinetti theorem").
Pasinetti examined the multiplier-accelerator family of models and concluded that they were unable to endogenously explain the interaction of the trend and the cycle due to their aggregate character.
The purpose of this paper is to extend Pasinetti's 1962 model by adding a behavioral entrepreneurial expectations formulation to its structure. The extended model generates an interacting trend and cycle and closely mimics U.S. macroeconomic data. Full Information Maximum Likelihood estimation with Optimal Filtering (FIMLOF) is used to estimate the model's behavioral parameters, some of which evolve over time. These results add value to the debate about the causes of the interaction between the trend and the cycle and serve to blend ideas from Pasinetti's two papers.