Accounting for uncertainty in a simple Keynesian model

Abstract

This paper provides a Keynesian model that is closer to the key ideas of The General Theory compared to contemporary models, which are very limited versions of The General Theory that ignore true uncertainty and ‘views about the future’, which have significant implication for the determination of income and for interpreting and predicting what is occurring in the macro economy. The paper shows how changes in long-term expectations lead to a ‘shifting equilibrium’ level of aggregate output. It also presents a Keynesian endogenous money market model and shows how the Keynes’s ‘conventional’ interest rate, typically ignored by the contemporary Keynesian models, affects the market rate. Our model thereby aims to be closer to The General Theory and more relevant to understanding the real world.