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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. Chatterjee, Santanu, 2005. "Capital utilization, economic growth and convergence," Journal of Economic Dynamics and Control, Elsevier, vol. 29(12), pages 2093-2124, December.
    2. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 70(1), pages 65-94.
    3. Jean-Pascal Benassy, 1975. "Neo-Keynesian Disequilibrium Theory in a Monetary Economy," Review of Economic Studies, Oxford University Press, vol. 42(4), pages 503-523.
    4. 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.
    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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    More about this item

    Keywords

    Growth models; Neoclassical models; Keynesian models; Involuntary unemployment;

    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
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General

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