Economic Growth

Economic Growth

New Directions in Theory and Policy

Edited by Phillip Arestis, Michelle Baddeley and John S.L. McCombie

This enlightening and significant volume focuses on the nature, causes and features of economic growth across a wide range of countries and regions. Covering a variety of growth related topics – from theoretical analyses of economic growth in general to empirical analyses of growth in the OECD, transition economies and developing economies – the distinguished cast of contributors addresses some of the most important contemporary issues and developments in the field.

Chapter 6: A Dynamic Framework for Keynesian Theories of the Business Cycle and Growth

Pedro Leão

Subjects: economics and finance, post-keynesian economics


Pedro Leão 1. INTRODUCTION Keynesian explanations of the cycle are essentially based on the interaction between the multiplier and the accelerator (for a comprehensive exposition of different Keynesian theories of the cycle, see Sherman 1991). However, and as we shall see, those explanations fail to account for the self-sustained nature of the booms and recessions we observe in the real world – processes where output growth (decline) in one period automatically leads to output growth (decline) in the following period, and so forth. In this chapter, we recast the multiplier–accelerator model of the cycle in a new dynamic framework. This is inspired by Harrod’s theory of economic growth (see Harrod 1939, 1948).1 The results are twofold. First, the resulting model provides a satisfactory explanation for the observed selfsustained nature of booms and recessions. Second, our dynamic framework suggests that at the root of booms and recessions may intriguingly lie the fact that a change in investment has a greater effect on aggregate demand than on aggregate supply. The paper is organized as follows. Section 2 explains why we do not find the multiplier–accelerator account of booms satisfactory. In Section 3 we present our dynamic framework. Sections 4 and 6 apply this framework to show the forces that move output up and down along booms and recessions. In Sections 5 and 7 we argue that several factors – mentioned by the Keynesian cycle literature – may at some point in a boom or a recession invert the dynamics...

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