SFB 303 Discussion Paper No. B - 42

Author: Krelle, Wilhelm
Title: Keynes and the Long RunAfter 50 Years: We Are Still Alive
Abstract: The Keynesian results can be interpreted as a solution of an interdependent dynamic difference equation system for the next period, given the initial conditions. But these results are only partly justifiable because in Keynes' system a demand function for bonds is lacking which would allow to take into account the influence of money supply on the price level as well as on the rate of interest.The Keynesian approach is not suitable for a multiperiod analysis without using econometric methods since the initial conditions change in a complicated way. Thus for a middle-term disequilibrium analysis only the econometric method is able to give useful results but only as long as the exogenous variables can be forecasted with some reliability.Passing to neoclassical growth theory and solving for the equilibrium growth path is possible under quite general assumptions. This approach gives useful results with respect to the trend of the exogenous variables and a more reliable guide line for economic policy than to look only for the immediate consequences. It also explains in a natural way why Keynesian methods do not work in the long run without resorting to rational expectations. In order to make them work in the long run, the wage setting behaviour of trade unions and employers with respect to the wage structure has to be amended so that less qualified persons also find employment. Otherwise only the already employed or better qualified persons will benefit from technical progress and higher GDP, while the less or inappropriately qualified persons will in the long run stay unemployed in spite of all the Keynesian global methods of employment policy
Creation-Date: March 1986
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