New Directions in Theory and Policy
Edited by Phillip Arestis, Michelle Baddeley and John S.L. McCombie
Chapter 8: A Keynesian Model of Unemployment and Growth: An Empirical Test
Wendy Cornwall* A. INTRODUCTION This chapter presents a simple econometric test of the core theory proposed by John Cornwall in Chapter 7 of this volume. Building on a Keynesian foundation, and with the requirement that it must have the capacity to explain the behaviour of real economies, the theory emphasises the central importance of aggregate demand. First, the level and growth of aggregate demand are viewed as the outcome of policy choices, which are endogenous to this model. Second, growth of aggregate demand induces aggregate supply growth, which is therefore also endogenous.1 These are the two essential components of the model that are to be tested here. The chapter has two main parts. The ﬁrst (Section B) introduces and discusses two equations implied by the theory. These determine aggregate demand and aggregate supply growth, represented here by unemployment rates and productivity growth respectively. Unemployment rates are the outcome of aggregate demand policy, which is endogenously determined via a constrained optimisation process. The determinants of the constraints and of the preferences to be optimised are labour market and other institutions, and the distribution of power. These are therefore ultimately determinants of the unemployment rate. Productivity growth depends on the result of the aggregate demand policy chosen, through its eﬀect on unemployment and other demand variables such as investment spending. These and other determinants of productivity growth, and the routes by which they act, are also examined in this part of the chapter. The second part of the chapter (Section C)...
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