New Directions in Theory and Policy
Edited by Phillip Arestis, Michelle Baddeley and John S.L. McCombie
Chapter 6: A Dynamic Framework for Keynesian Theories of the Business Cycle and Growth
6. A dynamic framework for Keynesian theories of the business cycle and growth 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...
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