Working Paper: NBER ID: w13406
Authors: Roger E. A. Farmer
Abstract: This paper is part of a broader project that provides a microfoundation to the General Theory of J.M. Keynes. I call this project 'old Keynesian economics' to distinguish it from new-Keynesian economics, a theory that is based on the idea that to make sense of Keynes we must assume that prices are sticky. I describe a multi-good model in which I interpret the definitions of aggregate demand and supply found in the General Theory through the lens of a search theory of the labor market. I argue that Keynes' aggregate supply curve can be interpreted as the aggregate of a set of first order conditions for the optimal choice of labor and, using this interpretation, I reintroduce a diagram that was central to the textbook teaching of Keynesian economics in the immediate post-war period.
Keywords: No keywords provided
JEL Codes: E12; E2; E24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Keynes' aggregate supply curve (E12) | aggregate demand and supply (E00) |
| expectations about future economic conditions (E66) | aggregate demand and supply (E00) |
| self-fulfilling beliefs of economic agents (D84) | expectations about future economic conditions (E66) |
| inefficiently high unemployment (J64) | steady-state equilibrium (D50) |
| self-fulfilling beliefs (D83) | steady state of the economic system (D50) |
| fiscal and monetary policy implications (E62) | New Keynesian models (E12) |