A Reformulation of the Keynesian Model (Full Employment or Not)

Abstract

This paper formulates the Keynesian model so that the sometimes-observed procyclical real wage can be explained. The paper defines an aggregate demand function based on portfolio balance with three assets (money, bond and equities) and an aggregate supply function derived from the supply behavior of representative price-setting firms. The money wage is endogenous but the usual result is short-period unemployment equilibrium. However, the case of full employment is also covered. The model also provides explanations of Phillips curve and stagflation phenomena.