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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.

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Bibliographic Info

Paper provided by CEPII research center in its series Working Papers with number 2013-01.

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Date of creation: Jan 2013
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Handle: RePEc:cii:cepidt:2013-01

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Keywords: Growth models; Neoclassical models; Keynesian models; Involuntary unemployment;

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  1. Benassy, Jean-Pascal, 1975. "Neo-Keynesian Disequilibrium Theory in a Monetary Economy," Review of Economic Studies, Wiley Blackwell, vol. 42(4), pages 503-23, October.
  2. Santanu Chatterjee, 2003. "Capital Utilization, Economic Growth and Convergence," Computing in Economics and Finance 2003 41, Society for Computational Economics.
  3. N. Gregory Mankiw, 1989. "Real Business Cycles: A New Keynesian Perspective," NBER Working Papers 2882, National Bureau of Economic Research, Inc.
  4. Backhouse, Roger E, 1981. "Keynesian Unemployment and the One-Sector Neoclassical Growth Model," Economic Journal, Royal Economic Society, vol. 91(361), pages 174-87, March.
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