Aggregate demand shocks and economic growth (original) (raw)
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Aggregate demand, instability, and growth
Review of Keynesian Economics, 2013
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, no endogenous dynamic process exists to assure that demand grows fast enough to employ a growing labor force. Yet output grows persistently over long periods, occasionally reaching approximate full employment. We resolve this puzzle by invoking Harrod's instability results. Demand grows because it follows an explosive upward path that is ultimately limited by resource constraints. Downward demand instability is contained by introducing an autonomous component to aggregate demand.
Aggregate Demand, Aggregate Supply and Economic Growth
International Review of Applied Economics, 2006
While mainstream growth theory in its neoclassical and new growth theory incarnations has no place for aggregate demand, Keynesian growth models in which aggregate demand determines growth neglect the role of aggregate supply. By assuming that the rate of technological change responds to labour market conditions, this paper develops a simple and conventional growth model that integrates the roles of aggregate demand and aggregate supply. The model shows how the long-run equilibrium growth rate of the economy, at which the unemployment rate is constant, can be affected by aggregate demand. 320 A. K. Dutt problems of unemployment and the deviation of aggregate demand from aggregate supply in the longer run.
The dynamic effects of aggregate demand and supply disturbances: Another look
Economics Letters, 1995
In a recent paper, Blanchard and Quah (American Economic Review, 1989, 79, 655-673) propose a set of restrictions to identify the structural innovations from a reduced-form bivariate model of income growth and unemployment. Given the assumptions made by Blanchard and Quah on the time-series properties of the data, this paper demonstrates that their bivariate model is just a special case of Stock and Watson's Journal of the American Statistical Association, 1988, 83, 1097-1107) common trends representation. More importantly, this alternative representation allows the econometrician to test the long-run restrictions used by Blanchard and Quah to distinguish between demand and supply innovations.
The GSTF Journal on Business Review, 2012
Discussions on macroeconomic systems, their relevance and validity mainly focused on Developed Countries. Survey of development literature, on the other hand, shows there was scanty direct effort to discuss which macroeconomic system or school was relevant for the Less Developed Countries (LDCs) and Newly Industrializing Countries NICs). Similarly, for instance, much of the more recent discussions concerning the implementation of market economy in these countries. Yet we long had three major blocks to build a macroeconomic model for LDCs and NICs. These were: the relevance of Keynesian aggregate demand, the excess labor and scarcity of capital, and the limited substitutability between labor and capital. The latter two gave rise to capital constraint for production and to technological unemployment. In addition, rigidities and non-automaticity of aggregate demand generally gave an inflationary gap and demand inflation alongside technological unemployment. This model is fundamentally Keynesian with special conditions surrounding the production function, supply and demand for labor taken into consideration. Going further, we may also add foreign exchange constraint to the capital constraint. Problems of LDCs and NICs, policy recommendations to achieve prudent financial management, and the more recent attempts to move towards the market economy and globalization can all be explained within this Keynesian framework. I. INTRODUCTION: AN OVERVIEW OF THE DEVELOPMENT LITERATURE Discussions about macroeconomic systems and schools, their relevance and validity, usefulness of their policy recommendations were mainly focused on Developed Countries (DCs). Very rightly and understandably there were no systematic attempts to investigate their applicability to the Less Developed Countries (LDCs) and Newly Industrializing Countries (NICs). This is true of the discussions about the Classical versus the Keynesian System, Neo-Classical Synthesis, Neo-Classical System
New growth theory, effective demand, and post-Keynesian dynamics
2003
This paper provides a critical appraisal of new growth theory from the perfective of post-Keynesian approach to macroeconomic dynamics. It argues that new growth theory appears new from the point of view of introducing endogenous growth only if one ignores many nonneoclassical contributions to old growth theory. New growth theory also suffers from other problems, including the fact that it does not incorporate effective demand issues and unemployment in the analysis, which play an important role in post-Keynesian growth models that draw on earlier non-neoclassical growth theory. By examining the role of technological change in the post-Keynesian growth model, it argues that the contribution of new growth theory is not very novel, and that the analysis of technological change can be improved by going beyond it, although by drawing from it as well. It also argues that new growth theory, by overemphasizing technology, has ignored many important issues which are relevant for the growth process, which can be usefully examined within post-Keynesian growth theory. This is illustrated with the example of the problem of consumer debt.
Economic Growth and Macroeconomic Dynamics
2004
One measure of the shape of production isoquants is the elasticity of substitution between factors. It ranges in value from zero to infinity, implying that no substitution is possible when it is zero and that factors are perfect substitutes when it is infinity. It has been a limitation on the generality of the conclusions of growth models that explicit treatment of substitution has largely been confined to cases in which the elasticity of substitution between labor and capital is unity. This limitation is imposed by the use of the Cobb-Douglas production function. 1 This chapter is based on Professor Swan's growth model, but the Cobb-Douglas production function is replaced by a production function which allows the elasticity of substitution to take any value between zero and infinity. It is seen that a variety of growth paths is possible, depending on the elasticity of substitution, and this leads to a reconsideration of the relation between income growth and the saving ratio. 1 Solow, op. cit., does consider the case in which the elasticity of substitution is 2. T. W. Swan's model, "Economic Growth and Capital Accumulation," Economic Record, 1956, uses the Cobb-Douglas function.
Fiscal and Monetary Policy in a Basic Endogenous Growth Model
Computational Economics, 2014
We present a monetary endogenous growth model and analyze the effects of fiscal and monetary policy with real money as an argument in the utility function. We show that a balanced government budget gives a higher balanced growth rate and lower inflation than a situation with permanent public deficits. It also leads to higher welfare compared to a situation with permanent deficits where the government does not put a high weight on stabilizing debt. However, when governments run deficits with a high weight on stabilizing debt, comparative welfare effects depend on the initial conditions with respect to public debt. Further, for a given monetary policy a stricter debt policy yields higher growth, lower inflation and higher welfare. A rise in the nominal money supply can compensate the negative growh effects of a loose debt policy up to a certain point but only at the cost of higher inflation and lower welfare.
Growth, cycles, and stabilization policy
Oxford Economic Papers
This paper presents an analysis of the joint determination of growth and business cycles with the view to studying the long-run implications of short-term monetary stabilization policy. The analysis is based on a simple stochastic growth model in which both real and nominal shocks have permanent effects on output due to nominal rigidities (wage contracts) and an endogenous technology (learning-by-doing). It is shown that there is a negative correlation between the mean and variance of output growth irrespective of the source of fluctuations. It is also shown that, in spite of this, there may exist a conflict between short-term stabilization and long-term growth depending on the type of disturbance. Finally, it is shown that, from a welfare perspective, the optimal monetary policy is that policy which maximizes long-run growth to the exclusion of stabilization considerations. Copyright 2005, Oxford University Press.