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A Keynesian general equilibrium model with competitive firms and rational expectations

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Abstract

A Keynesian general equilibrium model is developed from neoclassical principles. The model is based on competitive firm behavior, and optimizing agents that form expectations rationally. Firms determine their product price to maximize expected profits. Non-neutrality results follow from micro foundations that view firms as committing to a price and output level before actual demand is observed. It follows that optimal output levels are in part determined by demand conditions. In the general equilibrium framework, increases in government spending lead to welfare-improving increases in aggregate output.

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Author notes

  1. Ronald Balvers

    Present address: Department of Economics, West Virginia University, 26506-6025, Morgantown, WV, USA

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    1. Ronald Balvers
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    Additional information

    I thank Tom Cosimano, Strat Douglas, Douglas Gale, Norm Miller, Nick Rowe, Geoffrey Woglom, and two anonymous referees for valuable comments. The responsibility for potential errors remains entirely my own.

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    Balvers, R. A Keynesian general equilibrium model with competitive firms and rational expectations. Zeitschr. f. Nationalökonomie 56, 23–38 (1992). https://doi.org/10.1007/BF01239490

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