The Long-Run Keynesian Multiplier

Abstract

We study the impact of investment on employment. In the short−run an increase in investment stimulates employment (this is the standard Keynesian multiplier). However increases of investment translate into increases in the capital stock. If labor and capital are substitutes (resp. complements), an increase in investment today decreases (resp. increases) employment tomorrow. We provide a formula to measure the overall effect of an increase in investment on emplyment, assuming that certain regularities hold.