Keynesian results in a neoclassical framework

Misdirected optimization and Classical involuntary unemployment. Recently much attention has been devoted to Classical unemployment. Unlike previous models however, here persistent Classical involuntary unemployment may result even when all firms and consumers optimize and all prices are determined competitively. The optimizing choices of agents are based on expectations of the unknown future. If expectations are erroneous, past decisions are not optimal in hindsight. With fully indexed wage contracts, a monetary disturbance will affect consumers' desired labor supply but not the firms' labor demand. When agents incorrectly choose resources, e.g. savings, Classical involuntary unemployment results.; A microtheoretic basis for Keynesian macroeconomics. Much attention has been devoted to the exploration for suitable microfoundation for Keynesian unemployment. However, unlike many models that rely on market imperfections, the simple model presented here produces traditional Keynesian unemployment by employing the fundamental assumption made by Keynes: disappointed expectations. Persistent involuntary unemployment may result even when all firms and consumers optimize and all prices are determined competitively. A monetary disturbance affects consumers' desired labor supply and the firms' labor demand. When past decisions such as savings are binding, perfect foresight on one side of the labor market, i.e. firms or consumers, is not sufficient to guarantee full employment. Decisions of both firms and consumers are based on expectations of the unknown future. If the expectations of firms' or consumers' or both are erroneous, the traditional Keynesian model emerges from a Classical framework.; Why real wages do not fall when there is unemployment. Erroneous anticipations of fiscal policy result in involuntary unemployment. If mutually agreeable, unemployment may be eradicated by recontracting the real wage and employment level. However, if labor demand is inelastic, unit elastic, or within a bounded elastic range, unemployment persists.