A Keynesian Endogenous Growth Theory with a Rigorous Microeconomic Foundation

ABSTRACT

Extending the effective demand theory developed by Otaki [1,2], we construct a demand-driven endogenous growth theory with a rigorous microeconomic foundation. An accelerator-principle investment function is derived by the intertemporal maximization behavior of monopolistic competitive employers. Under this investment function, an economy endogenously begins to expand even if the stability condition for goods markets is satisfied. Three factors determine the equilibrium growth rate: the degree of monopoly (the inverse of the price elasticity of each good)*η*^{﹣1}, the marginal propensity to saving *s*, and the Mashallian *k* that can be manipulated by the government and is denoted by *κ*. The higher values of *η*^{﹣1} and *s*, and the lower value of *κ* , the more rapidly the economy expands.

Extending the effective demand theory developed by Otaki [1,2], we construct a demand-driven endogenous growth theory with a rigorous microeconomic foundation. An accelerator-principle investment function is derived by the intertemporal maximization behavior of monopolistic competitive employers. Under this investment function, an economy endogenously begins to expand even if the stability condition for goods markets is satisfied. Three factors determine the equilibrium growth rate: the degree of monopoly (the inverse of the price elasticity of each good)

Cite this paper

M. Otaki, "A Keynesian Endogenous Growth Theory with a Rigorous Microeconomic Foundation,"*Theoretical Economics Letters*, Vol. 2 No. 4, 2012, pp. 365-368. doi: 10.4236/tel.2012.24067.

M. Otaki, "A Keynesian Endogenous Growth Theory with a Rigorous Microeconomic Foundation,"

References

[1] M. Otaki, “The Dynamically Extended Keynesian Cross and the Welfare-Improving Fiscal Policy,” Economics Letters, Vol. 96, No. 1, 2007, pp. 23-29.

[2] M. Otaki, “A Welfare Economics Foundation for the Full-Employment Policy,” Economics Letters, Vol. 102, No. 1, 2009, pp. 1-3.

[3] R. E. Lucas Jr., “Expectations and the Neutrality of Money,” Journal of Economic Theory, Vol. 4, No. 2, 1972, pp. 103-124.

[4] R. F. Harrod, “An Essay in Dynamic Theory,” Economic Journal, Vol. 49, No. 193, 1939, pp. 14-33.

[5] J. R. Hicks, “A Contribution to the Theory of Trade Cycle,” Oxford University Press, Oxford, 1950.

[6] F. Hayashi and E. C. Prescott, “The 1990s in Japan: A Lost Decade,” Review of Economic Dynamics, Vol. 5, No. 1, 2002, pp. 206-235.

[7] J. M. Keynes, “The General Theory of Employment, Interest and Money,” Macmillan, London, 1936.

[8] M. Otaki, “A Pure Theory of Aggregate Price Determination,” Theoretical Economics Letters, Vol. 1, No, 3, 2011, pp. 122-128.

[1] M. Otaki, “The Dynamically Extended Keynesian Cross and the Welfare-Improving Fiscal Policy,” Economics Letters, Vol. 96, No. 1, 2007, pp. 23-29.

[2] M. Otaki, “A Welfare Economics Foundation for the Full-Employment Policy,” Economics Letters, Vol. 102, No. 1, 2009, pp. 1-3.

[3] R. E. Lucas Jr., “Expectations and the Neutrality of Money,” Journal of Economic Theory, Vol. 4, No. 2, 1972, pp. 103-124.

[4] R. F. Harrod, “An Essay in Dynamic Theory,” Economic Journal, Vol. 49, No. 193, 1939, pp. 14-33.

[5] J. R. Hicks, “A Contribution to the Theory of Trade Cycle,” Oxford University Press, Oxford, 1950.

[6] F. Hayashi and E. C. Prescott, “The 1990s in Japan: A Lost Decade,” Review of Economic Dynamics, Vol. 5, No. 1, 2002, pp. 206-235.

[7] J. M. Keynes, “The General Theory of Employment, Interest and Money,” Macmillan, London, 1936.

[8] M. Otaki, “A Pure Theory of Aggregate Price Determination,” Theoretical Economics Letters, Vol. 1, No, 3, 2011, pp. 122-128.