Nominal Wage Adjustment, Demand Shortage and Economic Policy
AbstractWe formulate nominal wage adjustment by incorporating various concepts of fairness. By applying it into a continuous-time money-in-utility model we examine macroeconomic dynamics with and without a liquidity trap and obtain the condition for persistent unemployment, and that for temporary unemployment, to occur. These conditions turn out to be critical, since policy implications significantly differ between the two cases. A monetary expansion raises private consumption under temporary unemployment but does not under persistent unemployment. A fiscal expansion may or may not increase short-run private consumption but crowds out long-run consumption under temporary unemployment. Under persistent unemployment, however, it always increases private consumption.
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Bibliographic InfoPaper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0760.
Date of creation: Nov 2009
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-11-21 (All new papers)
- NEP-CBA-2009-11-21 (Central Banking)
- NEP-DGE-2009-11-21 (Dynamic General Equilibrium)
- NEP-MAC-2009-11-21 (Macroeconomics)
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- Ryu-ichiro Murota & Yoshiyasu Ono, 2010. "A Reinterpretation of the Keynesian Consumption Function and Multiplier Effect," ISER Discussion Paper 0779, Institute of Social and Economic Research, Osaka University.
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