Reconciling Krugman and Keen – An analysis of the relation between debt and aggregate demand using nef model, Emanuele Campiglio, Giovanni Bernardo, New Economics Foundation London July 23, 2012
“In this presentation we use nef macroeconomic model to clarify Keens analysis. We do so by explicitly identifying two different variables: 1. Realized expenditures (ER); 2. Planned (or desired) expenditures (EP). We show how the main difference between him and Krugman (and the main source of confusion in the debate) is the way they think of aggregate demand: Krugman identifies Aggregate Demand with Realized Expenditure; Keen instead defines Aggregate Demand with Planned Expenditure. Using numerical simulations, we show that, both Keen and Krugman are right in their own logic: Realized Expenditure (Krugmans Aggregate Demand) is indeed equal to Aggregate Income. That is equivalent to say that at the end of each period recorded income will be equal to recorded expenditure. What has been actually spent will result to be someone elses income. Planned Expenditure (Keens Aggregate Demand) can instead be different from Aggregate Income and the discrepancy is, as Keen argues, equal to the net change in the levels of debt.”
