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When Demand Creates its Own Supply: Saving Traps

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  • Christophe Chamley

Abstract

The mechanism by which aggregate supply creates the income that generates its matching demand (called Say's Law), may not work in a general equilibrium with decentralized markets and savings in bonds or money. Full employment is an equilibrium, but convergence to that state is slow. A self-fulfilling precautionary motive to accumulate bonds (with a zero aggregate supply) can set the economy on an equilibrium path with a fast convergence towards a steady state with unemployment that may be an absorbing state from which no equilibrium path emerges to restore full employment.

Suggested Citation

  • Christophe Chamley, 2014. "When Demand Creates its Own Supply: Saving Traps," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(2), pages 651-680.
    • Handle: RePEc:oup:restud:v:81:y:2014:i:2:p:651-680
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    File URL: http://hdl.handle.net/10.1093/restud/rdt041
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    Cited by:

    1. Jonathan Heathcote & Fabrizio Perri, 2018. "Wealth and Volatility," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(4), pages 2173-2213.
    2. Xavier Ragot & Florin O. Bilbiie, 2016. "Monetary Policy, Inflation, and Inequality: The Case for Helicopters," 2016 Meeting Papers 1663, Society for Economic Dynamics.
    3. Paul Beaudry & Dana Galizia & Franck Portier, 2018. "Reconciling Hayek’s and Keynes’ Views of Recessions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(1), pages 119-156.
    4. repec:hal:spmain:info:hdl:2441/5t91n0a7l99k94kkmrh3362v8 is not listed on IDEAS
    5. Édouard Challe, 2018. "Is the Study of Business-Cycle Fluctuations “Scientific?”," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(3), pages 151-165.
    6. Kuhle, Wolfgang, 2021. "Equilibrium with computationally constrained agents," Mathematical Social Sciences, Elsevier, vol. 109(C), pages 77-92.
    7. Monnet, Eric & Degorce, Victor, 2020. "The Great Depression as a Saving Glut," CEPR Discussion Papers 15287, C.E.P.R. Discussion Papers.
    8. Herakles Polemarchakis, 2015. "Markets and Efficiency," The Japanese Economic Review, Japanese Economic Association, vol. 66(2), pages 150-166, June.
    9. Edouard Challe, 2017. "Uninsured Unemployment Risk and Optimal Monetary Policy," Working Papers 2017-54, Center for Research in Economics and Statistics.
    10. Robertas Zubrickas, 2020. "Contingent wage subsidy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(4), pages 1105-1119, August.
    11. Wolfgang Kuhle, 2016. "An Equilibrium Model with Computationally Constrained Agents," Papers 1611.01771, arXiv.org.
    12. Habanabakize Thomas & Muzindutsi Paul-Francois, 2018. "Analysis of the Keynesian Theory of Employment and Sectoral Job Creation: The Case of the South African Manufacturing Sector," Folia Oeconomica Stetinensia, Sciendo, vol. 18(1), pages 123-143, June.
    13. Corsetti, Giancarlo & Brendon, Charles, 2016. "COEURE Survey: Fiscal and Monetary Policies after the Crises," CEPR Discussion Papers 11088, C.E.P.R. Discussion Papers.

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