Abstract
We investigate how economic growth in a demand-driven economy with semi-endogenous productivity growth can be compatible with a stable employment path. Our model uses a Sraffian supermultiplier (SSM), and we endogenize the growth rate of autonomous demand, and semi-endogenize productivity growth. The basic model has a steady state that is consistent with a stable employment rate, and in which the growth rate is determined by R&D expenditures. Consumption smoothing (between periods of high and low employment) by workers is the mechanism that ensures that demand keeps up with productivity growth and that the growing economy is stable. We also introduce a version of the model where the burden for stabilization falls upon government fiscal policy. This also yields a stable growth path, although the parameter restrictions for stability are more demanding in this case.
Highlights
The core of Keynesian economics is the rejection of Say’s Law, or, phrased in a more positive way, the importance of the demand side of the economy
We look at the stable steady state that our model looks after as a baseline economic mechanism upon which we must seek to add turbulence by means of additional economic factors that will remain unspecified in our current analysis
The models that we developed in this paper confirm that a long-run steady state with economic growth generated by technological change and endogenous autonomous consumption spending can be consistent with a stable employment rate
Summary
The core of Keynesian economics is the rejection of Say’s Law, or, phrased in a more positive way, the importance of the demand side of the economy. In turn technological change is the main source of long-run productivity growth, and the literature on economic growth has identified investment in technological change as a prime driver of growth This puts Research and Development (R&D) at the center of analysis (e.g., Aghion and Howitt, 1992 in the mainstream tradition, or Nelson & Winter, 1982 and Silverberg and Verspagen, 1994 in the evolutionary tradition). The central question that the model tries to address is how, and under which parameter settings, demand, both autonomous (i.e., not dependent on current income) and non-autonomous demand, and productivity growth will adjust to each other to produce a meaningful and stable steady state growth path More technical details on the model can be found in three appendices
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