IS-LM UNDER INCREASING RETURNS

This paper attempts a systematic examination of the significance of increasing returns for macroeconomic theory. Two main questions are addressed: (i) What are the implications for the construction of macromodels of the assumption of increasing returns? and (ii) What are the implications for the results of typical comparative statics experiments? An IS-LM model incorporating increasing returns is constructed, on the basis of which it is argued that there may not be a unique point of labor-market clearing. It is argued that this possibility strengthens the case for policy activism. © 1991 Louisiana State University Press.