Economic Growth
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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.
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Chapter 7: A Keynesian Model of Unemployment and Growth: Theory

John Cornwall


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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