IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Aggregate Demand, Investment and the NAIRU

Listed author(s):
  • Malcolm Sawyer

    (The Jerome Levy Economics Institute)

The NAIRU (non accelerating inflation rate of unemployment) is generally viewed as a supply-side determined short run equilibrium rate of unemployment. Aggregate demand plays no essential part in the determination of the equilibrium rate of unemployment. In those models from which a NAIRU is derived where aggregate demand makes an appearance, the nature of the model is such that the level of demand adjusts to the level of employment set by the supply-side factors, and those supply-side factors are invariant to the level of demand. The adjustment of aggregate demand can take place through a variety of routes, such as the real balance effect and fiscal stance used to avoid accelerating inflation, but the precise mechanism is not of central significance here (for further discussion see Sawyer, 1997). The focus of this paper is on the role of aggregate demand on the determination of the level of employment within the general context of some of NAIRU (by which we mean an equilibrium level of unemployment consistent where the forces determining that equilibrium arise from price and wage determination). Two aspects of the relationship between the level of aggregate demand and the NAIRU are particular significance. First, it is argued that the real wage - employment relationship based on enterprise decisions (which many mistakenly refer to as the demand for labor schedule) cannot be fully articulated without reference to the level of aggregate demand. Second, and more significantly for this paper, a model is derived in which investment through additions to the capital stock shifts that real wage - employment relationship, and with a sufficiently expansionary environment investment can shift that relationship until the NAIRU is compatible with full employment. A number of limitations on this conclusion are discussed.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by EconWPA in its series Macroeconomics with number 9712012.

in new window

Length: 23 pages
Date of creation: 24 Dec 1997
Handle: RePEc:wpa:wuwpma:9712012
Note: Type of Document - Acrobat PDF; prepared on IBM PC ; to print on PostScript; pages: 23; figures: included/request from author/draw your own
Contact details of provider: Web page:

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpma:9712012. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.