Walras' Law and Keynesian Macroeconomics

Thomas Palley

Australian Economic Papers, 1998, vol. 37, issue 3, 330-340

Abstract: This paper examines the claim that Keynesian models violate Walras' law. Walras' law is founded in the logic of exchange. Standard statements misrepresent it, as it pertains to a monetary economy. Keynesian models are consistent with Walras' law once this misrepresentation is corrected. The law holds for both notional and effective demands. It also holds in unconstrained Walrasian equilibria, constrained Walrasian equilibria, and constrained non‐Walrasian equilibria. The latter corresponds to a Keynesian conception of equilibrium: markets need not clear, but agents expectations must be fulfilled.

Date: 1998
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