Macroeconomia e Teoria Monetária (2 º Sem 2014/2015)

According to Harrod, economic expansions are characterized by explosive paths of output until full-employment is reached. We started by arguing that Harrod's conclusion depends critically on his assumption that firms quickly adjust their capital stock to changes in output. Afterwards we investigated what happens if, by contrast, we make the more realistic assumption that firms adopt a 'wait and see attitude', making only gradual adjustments of their capital stock to changes in output.

We arrived at a model that predicts that "as the [economic] system progresses in an upward direction, the forces propelling it upwards at first gather force and have a cumulative effect on one another, but gradually lose strength until at a certain point [often still below full-employment] they tend to be replaced  by forces operating in the opposite direction." (Keynes, 1936, pp. 313-4). These conclusions are consistent with the detailed empirical study of the U.S. post-war economic cycles carried out by Harvey (JPKE, 2014).

Another conclusion of our model was that fiscal policy affects the economy well beyond the Keynesian multiplier. Indeed, the sort-term variation in output generated by the multiplier tends to lead to changes in capacity utilization, investment and output "with a cumulative effect on one another" that extend over periods of several years.