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Aggregate Demand, Instability, and Growth

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  • Steven M. Fazzari
  • Pietro E. Ferri
  • Edward G. Greenberg
  • Anna Maria

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, 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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Paper provided by Institute for New Economic Thinking (INET) in its series INET Research Notes with number 2.

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Date of creation: May 2012
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Publication status: Published in Review of Keynesian Economics, Vol. 1 No. 1, Spring 2013, pp. 1-21
Handle: RePEc:thk:rnotes:2

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

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  1. De Long, James Bradford & Summers, Lawrence H, 1986. "Is Increased Price Flexibility Stabilizing?," American Economic Review, American Economic Association, vol. 76(5), pages 1031-44, December.
  2. Skott,Peter, 1989. "Conflict and Effective Demand in Economic Growth," Cambridge Books, Cambridge University Press, number 9780521365963, April.
  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.
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  5. 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.
  6. Peter Skott & Ben Zipperer, 2012. "An empirical evaluation of three post-Keynesian models," European Journal of Economics and Economic Policies: Intervention, Edward Elgar, vol. 9(2), pages 277-307.
  7. Ferri, Piero & Minsky, Hyman P., 1992. "Market processes and thwarting systems," Structural Change and Economic Dynamics, Elsevier, vol. 3(1), pages 79-91, June.
  8. Tobin, James, 1975. "Keynesian Models of Recession and Depression," American Economic Review, American Economic Association, vol. 65(2), pages 195-202, May.
  9. 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.
  10. Aghion, Philippe & Banerjee, Abhijit, 2005. "Volatility and Growth," OUP Catalogue, Oxford University Press, number 9780199248612, September.
  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. Palley, Thomas I., 2008. "Keynesian models of deflation and depression revisited," Journal of Economic Behavior & Organization, Elsevier, vol. 68(1), pages 167-177, October.
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