A Keynesian model of aggregate demand in the long‐run

Abstract This paper develops the Keynesian theory of aggregate demand in the long‐run in which persistently low levels of aggregate demand can generate persistently low levels of activity with the associated persistently high rates of unemployment. Wages are determined by firm‐worker bargaining/sharing. Investment is influenced by monopoly power, aggregate demand and the interest rate. Decreasing rates of deflation of money wages and prices even at high rates of unemployment are prevented by workers being assumed to be loss averse with respect to reductions in their wages below a reference real wage.