Demand-Led Growth and Accommodating Supply

47 Pages Posted: 1 Feb 2018 Last revised: 18 Dec 2019

See all articles by Steven M. Fazzari

Steven M. Fazzari

Washington University in St. Louis

Piero Ferri

University of Bergamo - Dipartimento di Scienze Economiche

Anna Maria Grazia Variato

University of Bergamo

Date Written: May 15, 2019

Abstract

We model demand-led growth with endogenous adjustment of labor supply and productivity to accommodate the demand-led path, reconciling Harrod’s warranted rate of demand growth with supply. The model delivers a range of growth paths and unemployment rates rather than a single “natural rate.” Theoretically, the steady-state growth path may be dynamically stable or unstable, but a detailed empirical calibration favors stability. We show analytically that if demand dynamics are stable, supply will converge to demand. While a minimum unemployment rate ultimately imposes a supply constraint on growth, empirical results show that a wide range of steady-state growth rates are feasible across different demand regimes. The results explain how economies can become trapped with low growth due to weak demand or fiscal austerity and suggest policy responses to stagnant demand

Keywords: demand-led growth, autonomous demand, supermultiplier, aggregate demand and supply reconciliation, secular stagnation

JEL Classification: E12, O40, E32

Suggested Citation

Fazzari, Steven M and Ferri, Piero and Variato, Anna Maria Grazia, Demand-Led Growth and Accommodating Supply (May 15, 2019). Available at SSRN: https://ssrn.com/abstract=3108711 or http://dx.doi.org/10.2139/ssrn.3108711

Steven M Fazzari (Contact Author)

Washington University in St. Louis ( email )

One Brookings Drive
St. Louis, MO 63130
United States
314-935-5693 (Phone)
314-935-4156 (Fax)

Piero Ferri

University of Bergamo - Dipartimento di Scienze Economiche ( email )

Via Salvecchio, 19
Bergamo, 24129
Italy

Anna Maria Grazia Variato

University of Bergamo ( email )

Via Salvecchio, 19
Bergamo, 24129
Italy

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