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Destabilizing a stable crisis: Employment persistence and government intervention in macroeconomics

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  • Costa Lima, B.
  • Grasselli, M.R.
  • Wang, X.-S.
  • Wu, J.

Abstract

The basic Keen model is a three-dimensional dynamical system describing the time evolution of the wage share, employment rate, and private debt in a closed economy. In the absence of government intervention this system admits, among others, two locally stable equilibria: one with a finite level of debt and nonzero wages and employment rate, and another characterized by infinite debt and vanishing wages and employment. We show how the addition of a government sector, modelled through appropriately selected functions describing spending and taxation, prevents the equilibrium with infinite debt. Specifically, we show that, by countering the fall in private profits with sufficiently high government spending at low employment, the extended system can be made uniformly weakly persistent with respect to the employment rate. In other words, the economy is guaranteed not to stay in a permanently depressed state with arbitrarily low employment rates.

Suggested Citation

  • Costa Lima, B. & Grasselli, M.R. & Wang, X.-S. & Wu, J., 2014. "Destabilizing a stable crisis: Employment persistence and government intervention in macroeconomics," Structural Change and Economic Dynamics, Elsevier, vol. 30(C), pages 30-51.
  • Handle: RePEc:eee:streco:v:30:y:2014:i:c:p:30-51
    DOI: 10.1016/j.strueco.2014.02.003
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    References listed on IDEAS

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    Cited by:

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    2. Grasselli, Matheus R. & Nguyen-Huu, Adrien, 2018. "Inventory growth cycles with debt-financed investment," Structural Change and Economic Dynamics, Elsevier, vol. 44(C), pages 1-13.
    3. Barrett, Adam B., 2018. "Stability of Zero-growth Economics Analysed with a Minskyan Model," Ecological Economics, Elsevier, vol. 146(C), pages 228-239.
    4. Giraud, Gaël & Grasselli, Matheus, 2021. "Household debt: The missing link between inequality and secular stagnation," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 901-927.
    5. Timothy Betts & Patrice M. Buzzanell, 2022. "Enacting Economic Resilience: A Synthesis of Economic and Communication Frameworks," JRFM, MDPI, vol. 15(4), pages 1-18, April.
    6. Soon Ryoo & Peter Skott, 2017. "Fiscal and Monetary Policy Rules in an Unstable Economy," Metroeconomica, Wiley Blackwell, vol. 68(3), pages 500-548, July.
    7. Gaël Giraud & Matheus GRASSELLI, 2017. "The macrodynamics of household debt, growth, and inequality," Working Paper c15af656-d7a4-485c-867f-5, Agence française de développement.
    8. Bovari, Emmanuel & Giraud, Gaël & Mc Isaac, Florent, 2018. "Coping With Collapse: A Stock-Flow Consistent Monetary Macrodynamics of Global Warming," Ecological Economics, Elsevier, vol. 147(C), pages 383-398.
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    10. Matheus R. Grasselli & Aditya Maheshwari, 2018. "Testing a Goodwin model with general capital accumulation rate," Papers 1803.01536, arXiv.org.

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    More about this item

    Keywords

    Government intervention; Persistence; Keen model; Stock-flow consistency;
    All these keywords.

    JEL classification:

    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G01 - Financial Economics - - General - - - Financial Crises

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