Savings, Investment and Growth: New Approaches for Macroeconomic Modelling

We prove that profit maximization behavior and the neoclassical growth model can be consistent. Moreover, we present a new medium term Keynes-Solow macro model. The short-term Keynesian macroeconomic model shows that a rise in the savings rate will reduce output, while higher savings imply for the neoclassical growth model a rise in the long run per capita income. The Keynes-Solow model sheds new light on the role of the savings rate. The Keynes-Solow model presented links both the short run and the long run, thus suggesting a new way of consistent macroeconomic modelling and of analyzing the efficiency of fiscal and monetary policy - and the role of supply-side policy. The model also is applied to some key issues of the New Economy, whose characteristics affect the effectiveness of fiscal policy and other policy instruments. The model presented suggests that government policy should focus not only on short term effects but more on medium term aspects. The medium term effect of monetary policy is larger than in the short run. Supply-side policy will raise medium term output whenever the golden rule is fulfilled and under certain other conditions, too. Our conclusions go well beyond the monetarist debate and put the focus on the consumption function, the output elasticity of capital and the depreciation rate - as well as the role of foreign direct investment.