Aggregate Demand, Instability, and Growth
AbstractThis 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, there is no endogenous dynamic process to assure that demand grows fast enough to absorb the production of a growing labor force. Yet output grows persistently over long periods, occasionally reaching approximate full employment. We resolve this puzzle by invoking Harrods’s instability results. Demand grows because it follows an explosive upward path that is ultimately constrained by resource constraints. Downward demand instability is contained by introducing an autonomous component to aggregate demand.
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Bibliographic InfoPaper provided by Institute for New Economic Thinking (INET) in its series INET Research Notes with number 2.
Date of creation: May 2012
Date of revision:
Publication status: Published in Review of Keynesian Economics, Vol. 1 No. 1, Spring 2013, pp. 1-21
economic growth; instability; aggregate demand; floors and ceilings;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
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