- Université Paris 13
Wednesday, March 29, 2017
Polo Santa Marta, Via Cantarane 24, Room 1.59
In this paper I extend the Solow growth model by introducing a mechanism which allows to determine involuntary unemployment explained by the weakness in aggregate demand.
In the baseline model, I introduce a simple investment function and I find that an increase in aggregate demand (due to a reduction in the saving rate or to an increase in public expenditures) stimulates real GDP and reduces unemployment. Then, I modify the investment function in order to take into account the crowding-in/crowding-out effect on investments. This allows to build a class of models that are between neoclassical supply-driven models and Keynesian demand-driven models depending on the value of a key parameter that measures the degree of the crowding-in/crowding-out effect on investments and which lies between zero (for Keynesian models) and one (for neoclassical models). Estimations on seven OECD countries show that this key parameter is between 0.6 and 0.9. On average across countries, this parameter is close to 0.8 which implies that the fiscal multiplier is close to 1.