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The Solow Growth Model with Keynesian Involuntary Unemployment

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  • Riccardo Magnani

Abstract

The aim of this paper is to extend the Solow model in a way that permits to endogenize unemployment. Starting from a Neoclassical growth model, as the Solow model, we introduce a mechanism that allows us to determine the Keynesian unemployment, i.e. unemployment that is caused by the weakness of the aggregate demand. Using our base model, that works as a Keynesian demand-driven model, we find that an increase in the aggregate demand (due to a reduction in the saving rate or to an increase in public expenditures) reduces unemployment and stimulates the GDP. Then, we modify the investment function in order to take into account for the crowding-in/crowding-out effect on investments. This allows us to build a model which is between Neoclassical supply-driven models and Keynesian demand-driven models.

Suggested Citation

  • Riccardo Magnani, 2013. "The Solow Growth Model with Keynesian Involuntary Unemployment," Working Papers 2013-01, CEPII research center.
    • Handle: RePEc:cii:cepidt:2013-01
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    References listed on IDEAS

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    1. Jean-Pascal Benassy, 1975. "Neo-Keynesian Disequilibrium Theory in a Monetary Economy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 42(4), pages 503-523.
    2. Chatterjee, Santanu, 2005. "Capital utilization, economic growth and convergence," Journal of Economic Dynamics and Control, Elsevier, vol. 29(12), pages 2093-2124, December.
    3. Mankiw, N Gregory, 1989. "Real Business Cycles: A New Keynesian Perspective," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 79-90, Summer.
    4. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 70(1), pages 65-94.
    5. Backhouse, Roger E, 1981. "Keynesian Unemployment and the One-Sector Neoclassical Growth Model," Economic Journal, Royal Economic Society, vol. 91(361), pages 174-187, March.
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    Cited by:

    1. Hala Hjazeen & Mehdi Seraj & Huseyin Ozdeser, 2021. "The nexus between the economic growth and unemployment in Jordan," Future Business Journal, Springer, vol. 7(1), pages 1-8, December.

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    More about this item

    Keywords

    Growth models; Neoclassical models; Keynesian models; Involuntary unemployment;
    All these keywords.

    JEL classification:

    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General

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