New Directions in Theory and Policy
Edited by Phillip Arestis, Michelle Baddeley and John S.L. McCombie
Chapter 7: A Keynesian Model of Unemployment and Growth: Theory
John Cornwall* A. INTRODUCTION The main objective of the paper is to extend the basic model of Keynes’s General Theory to explain medium- and long-run economic performance in developed capitalist economies. In this way we seek to deepen our understanding of the macroeconomic processes that account for diﬀerences in macro performance over time and between economies at similar stages of their economic development. It naturally starts from a conviction that Keynes’s original model of short-run economic ﬂuctuations is the appropriate foundation for further macroeconomic research. In the process of extending the traditional Keynesian model we frequently compare our views with those of the mainstream macroeconomic theory. The natural candidate for comparison is an extended version of New Keynesian macroeconomics, now popular in the textbooks (Blanchard and Melino, 1999; Ragan and Lipsey, 2005; Mankiw and Scarth, 2001). In the 1980s, it started as a well-received microeconomic research programme, whose main goal was to replace perfectly competitive neoclassical markets with imperfectly competitive Keynesian ones. This was followed by the incorporation of non-accelerating inﬂation rate of unemployment (NAIRU) analysis for modelling the short-run and eventually by the adoption of a long-run growth analysis, although this was not integrated with the short-run analysis. These subsequent developments, together with the earlier micro analysis, we can designate as mainstream macroeconomic theory, to be compared with our extended Keynesian macro theory. To better grasp the essential diﬀerences between the two views, the theoretical models are presented in the form of a limited number of...
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