The Solow Growth Model with Keynesian Involuntary Unemployment

The aim of this paper is to extend the Solow model in a way that permits to endogenize unemployment. Starting from a Neoclassical growth model, as the Solow model, we introduce a mechanism that allows us to determine the Keynesian unemployment, i.e. unemployment that is caused by the weakness of the aggregate demand. Using our base model, that works as a Keynesian demand-driven model, we find that an increase in the aggregate demand (due to a reduction in the saving rate or to an increase in public expenditures) reduces unemployment and stimulates the GDP. Then, we modify the investment function in order to take into account for the crowding-in/crowding-out effect on investments. This allows us to build a model which is between Neoclassical supply-driven models and Keynesian demand-driven models.