Aggregate Demand, Instability, and Growth

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This paper considers a puzzle in growth theory from a Keynesian perspective.

If neither wage and price adjustment nor monetary policy are effective at stimulating demand, there is no endogenous dynamic process to assure that demand grows fast enough to absorb the production of a growing labor force. Yet output grows persistently over long periods, occasionally reaching approximate full employment. We resolve this puzzle by invoking Harrods’s instability results. Demand grows because it follows an explosive upward path that is ultimately constrained by resource constraints. Downward demand instability is contained by introducing an autonomous component to aggregate demand.