Domar, expectations, and growth stabilization

Abstract

Abstract Evsey Domar investigated in the 1940s the implementation of growth stabilization policy under the assumption that policy makers and businessmen alike believed his theoretical growth model. Economic policy was supposed to work merely through the impact of its announcement on expectations. He claimed that confident expectations, generated by government’s assurance of future growth through fiscal policy, would induce private investment decisions in a scale that would bring about the required growth rate and by that justify the expectations, without putting the guarantee to test. Domar’s policy framework contrasts with the policy-ineffectiveness proposition of New Classical macroeconomics advanced in the 1970s. Domar’s stabilization plan is discussed in detail in the context of his growth model, together with similar ideas put forward by Roy Harrod, as the latter modified aspects of his original growth model, and critical reactions by Alvin Hansen.