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Aggregate demand, instability, and growth

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  • Steven M. Fazzari

    (Washington University)

  • Pietro E. Ferri

    (University of Bergamo)

  • Edward G. Greenberg

    (Washington University)

  • Anna Maria Variato

    (University of Bergamo)

Abstract

This paper considers a puzzle in growth theory from a Keynesian perspective. If neither wage and price adjustment nor monetary policy are effective at stimulating demand, no endogenous dynamic process exists to assure that demand grows fast enough to employ a growing labor force. Yet output grows persistently over long periods, occasionally reaching approximate full employment. We resolve this puzzle by invoking Harrod's instability results. Demand grows because it follows an explosive upward path that is ultimately limited by resource constraints. Downward demand instability is contained by introducing an autonomous component to aggregate demand.

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Bibliographic Info

Article provided by Edward Elgar in its journal Review of Keynesian Economics.

Volume (Year): 1 (2013)
Issue (Month): 1 (January)
Pages: 1-21

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Handle: RePEc:elg:rokejn:v:1:y:2013:i:1:p1-21

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Web page: http://www.elgaronline.com/roke

Related research

Keywords: economic growth; instability; aggregate demand; floors and ceilings;

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  1. Peter Skott, Ben Zipperer, 2010. "An empirical evaluation of three post Keynesian models," UMASS Amherst Economics Working Papers 2010-08, University of Massachusetts Amherst, Department of Economics.
  2. James Tobin, 1975. "Keynesian Models of Recession and Depression," Cowles Foundation Discussion Papers 387, Cowles Foundation for Research in Economics, Yale University.
  3. Puu, Tonu & Gardini, Laura & Sushko, Irina, 2005. "A Hicksian multiplier-accelerator model with floor determined by capital stock," Journal of Economic Behavior & Organization, Elsevier, vol. 56(3), pages 331-348, March.
  4. Thomas I. Palley, 2009. "Inside Debt and Economic Growth: A Cambridge - Kaleckian Analysis," IMK Working Paper 02-2009, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  5. J. Bradford De Long & Lawrence H. Summers, 1985. "Is Increased Price Flexibility Stabilizing?," NBER Working Papers 1686, National Bureau of Economic Research, Inc.
  6. Skott,Peter, 1989. "Conflict and Effective Demand in Economic Growth," Cambridge Books, Cambridge University Press, number 9780521365963.
  7. Aghion, Philippe & Banerjee, Abhijit, 2005. "Volatility and Growth," OUP Catalogue, Oxford University Press, number 9780199248612, September.
  8. Ferri, Piero & Minsky, Hyman P., 1992. "Market processes and thwarting systems," Structural Change and Economic Dynamics, Elsevier, vol. 3(1), pages 79-91, June.
  9. Palley, Thomas I., 2008. "Keynesian models of deflation and depression revisited," Journal of Economic Behavior & Organization, Elsevier, vol. 68(1), pages 167-177, October.
  10. Peter Skott & Soon Ryoo, 2007. "Macroeconomic implications of financialization," UMASS Amherst Economics Working Papers 2007-08, University of Massachusetts Amherst, Department of Economics.
  11. J. A. Kregel, 1980. "Economic Dynamics and the Theory of Steady Growth: An Historical Essay on Harrod's ‘Knife-edge'," History of Political Economy, Duke University Press, vol. 12(1), pages 97-123, Spring.
  12. Anwar Shaikh, 2009. "Economic Policy In A Growth Context: A Classical Synthesis Of Keynes And Harrod," Metroeconomica, Wiley Blackwell, vol. 60(3), pages 455-494, 07.
  13. Peter Skott, 2008. "Growth, instability and cycles: Harrodian and Kaleckian models of accumulation and income distribution," UMASS Amherst Economics Working Papers 2008-12, University of Massachusetts Amherst, Department of Economics.
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