Keynes' main concern in the General Theory is about the capacity of an economy to return to a full employment equilibrium when subject to a (negative) demand shock. He maintains that money wages cuts may not help reabsorb unemployment, as they do not necessarily imply a fall in real wages. On the contrary, wage rigidity may be necessary for avoiding that a cumulative process propels the economy far away the full employment equilibrium. The consideration of co-ordination failures in the investment-saving market is behind this conclusion. However, the analysis is carried out within a static equilibrium framework.This paper is an attempt to focus on the problems of intertemporal co-ordination arising within the context of a sequential economy. Our analysis of the out-of-equilibrium process of adjustment stirred by a shock of whatever nature allows to generalize the original Keynesian intuition. It shows in fact that unemployment emerges as the result of a lack of co-ordination due to irreversibly constrained choices, and that not only nominal but also real wage flexibility does not necessarily help to restore equilibrium. As a matter of fact, it may even be harmful, by triggering processes that make the economy diverge from equilibrium. The analysis carried out has important analytical implications as regards the role of market imperfections and the interpretation of the effects of monetary policy.
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Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number
2001-02.
Length: Date of creation: 2001 Date of revision: Publication status: Forthcoming in the Scottish Journal of Political Economy Handle: RePEc:fce:doctra:0102
Find related papers by JEL classification: D5 - Microeconomics - - General Equilibrium and Disequilibrium E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
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