Effective demand in a stylised Keynesian model of growth

Abstract

This paper models an economy which suffers from a coordination failure and lack of effective demand in the long run. Specifically, it shows that an input-output economy, with or without credit rationing, converges to a long-period growth path, but that this path is generally Pareto sub-optimal. Yet, although Keynesian problems extend to the long run, typical Keynesian solutions do not: the government seems generally incapable of sustaining growth by demand management measures. The question as to what the government can do to sustain growth is an open one.