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Monopolistic Competition, Efficiency Wages and Perverse Effects of Demand Shock

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  • Jim Malley
  • Hassan Molana

Abstract

In this paper we construct a stylised general equilibrium macromodel to show that demand led expansions may have unexpected effects when market imperfections lead to changes in labour productivity. We find some empirical support, from a number of European countries, for the main predictions of this model that unemployment and output are positively related when unemployment is low and inversely related when unemployment is high. An important policy insight that emerges from this study is that an exogenous stimulation of aggregate demand can only raise output and reduce unemployment provided the economy is operating relatively efficiently. However, when an economy is trapped in an inefficient equilibrium, positive demand shocks can lead, perversely, to an increase in unemployment.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2001/wp-cesifo-2001-05/cesifo_wp475.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 475.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_475

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Keywords: Efficiency wages; effort supply; monopolistic competition; multiple equilibria; stability; fiscal multiplier;

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References

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  1. Dixon, Huw & Lawler, Phillip, 1996. " Imperfect Competition and the Fiscal Multiplier," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 98(2), pages 219-31, June.
  2. Olivier Blanchard, 1998. "Revisiting European Unemployment: Unemployment, Capital Accumulation, and Factor Prices," NBER Working Papers 6566, National Bureau of Economic Research, Inc.
  3. Jim Malley & Thomas Moutos, 2000. "Capital Accumulation and Unemployment: A Tale of Two "Continents"," CESifo Working Paper Series 236, CESifo Group Munich.
  4. Disney, Richard F & Haskel, Jonathan & Heden, Ylva, 2000. "Restructuring And Productivity Growth In UK Manufacturing," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2463, C.E.P.R. Discussion Papers.
  5. Hoon, Hian Teck & Phelps, Edmund S, 1992. "Macroeconomic Shocks in a Dynamized Model of the Natural Rate of Unemployment," American Economic Review, American Economic Association, American Economic Association, vol. 82(4), pages 889-900, September.
  6. Molana, Hassan & Moutos, Thomas, 1992. "A Note on Taxation, Imperfect Competition and the Balanced Budget Multiplier," Oxford Economic Papers, Oxford University Press, vol. 44(1), pages 68-74, January.
  7. Moutos, Thomas, 1991. "Turnover costs, unemployment and macroeconomic policies," European Journal of Political Economy, Elsevier, Elsevier, vol. 7(1), pages 1-16, April.
  8. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 527, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Stiglitz, Joseph E., 1992. "Capital markets and economic fluctuations in capitalist economies," European Economic Review, Elsevier, Elsevier, vol. 36(2-3), pages 269-306, April.
  10. Aghion, Philippe & Howitt, Peter, 1994. "Growth and Unemployment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(3), pages 477-94, July.
  11. Fender, John & Yip, Chong K., 1993. "Monetary policies in an intertemporal macroeconomic model with imperfect competition," Journal of Macroeconomics, Elsevier, Elsevier, vol. 15(3), pages 439-453.
  12. Heijdra , B.J. & Ligthart, J.E. & Ploeg, F. van der, 1998. "Fiscal policy, distortionary taxation, and direct crowding out under monopolistic competition," Open Access publications from Tilburg University urn:nbn:nl:ui:12-376256, Tilburg University.
  13. Hart, Oliver, 1982. "A Model of Imperfect Competition with Keynesian Features," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 97(1), pages 109-38, February.
  14. Dixon, Huw, 1990. "Imperfect Competition, Unemployment Benefit and the Non-neutrality of Money: An Example," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 402-13, April.
  15. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  16. Startz, Richard, 1989. "Monopolistic Competition as a Foundation for Keynesian Macroeconomic Models," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(4), pages 737-52, November.
  17. Sala-i-Martin, Xavier X, 1996. " A Positive Theory of Social Security," Journal of Economic Growth, Springer, Springer, vol. 1(2), pages 2a77-304, June.
  18. Heijdra, Ben J & van der Ploeg, Frederick, 1996. "Keynesian Multipliers and the Cost of Public Funds under Monopolistic Competition," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 106(438), pages 1284-96, September.
  19. N. Gregory Mankiw, 1987. "Imperfect Competition and the Keynesian Cross," NBER Working Papers 2386, National Bureau of Economic Research, Inc.
  20. Ricardo J. Caballero & Mohamad L. Hammour, 1996. "The Macroeconomics of Specificity," NBER Working Papers 5757, National Bureau of Economic Research, Inc.
  21. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, American Economic Association, vol. 77(4), pages 647-66, September.
  22. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, American Economic Association, vol. 74(3), pages 433-44, June.
  23. Dixon, Huw, 1987. "A Simple Model of Imperfect Competition with Walrasian Features," Oxford Economic Papers, Oxford University Press, vol. 39(1), pages 134-60, March.
  24. Chatrerji, Monojit & Sparks, Roger, 1991. "Real wages, productivity, and the cycle: An efficiency wage model," Journal of Macroeconomics, Elsevier, Elsevier, vol. 13(3), pages 495-510.
  25. Reinhorn, Leslie J., 1998. "Imperfect competition, the Keynesian cross, and optimal fiscal policy," Economics Letters, Elsevier, Elsevier, vol. 58(3), pages 331-337, March.
  26. Danthine, Jean-Pierre & Donaldson, John B., 1990. "Efficiency wages and the business cycle puzzle," European Economic Review, Elsevier, Elsevier, vol. 34(7), pages 1275-1301, November.
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Cited by:
  1. Jim Malley & Hassan Molana, 2007. "The Relationship between Output and Unemployment with Efficiency Wages," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 8, pages 561-577, November.

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