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Expected Aggregate Demand, the Production Period and the Keynesian Theory of Aggregate Supply

Thomas Palley

The Manchester School of Economic & Social Studies, 1997, vol. 65, issue 3, 295-309

Abstract: This paper presents a model of Keynesian aggregate supply behavior. In the model, production takes time, which introduces a lag between the incurrence of costs and the receipt of revenues. Aggregate supply is determined by expectations of aggregate demand, and actual aggregate demand depends on actual aggregate supply. Expectations of lower future nominal wages can reduce employment because of the 'cash flow' effect, whereby lower future nominal wages cause lower future prices, thus rendering firms unable to recover costs fully. This effect represents a supply-side obstacle to using nominal wage deflation to restore full employment, and it complements traditional demand-side debt-deflation effects. Copyright 1997 by Blackwell Publishers Ltd and The Victoria University of Manchester

Date: 1997
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Handle: RePEc:bla:manch2:v:65:y:1997:i:3:p:295-309