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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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Bibliographic Info

Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2000_20.

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Date of creation: Dec 2000
Date of revision: Feb 2001
Handle: RePEc:gla:glaewp:2000_20

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  23. Jim Malley & Thomas Moutos, 2000. "Capital Accumulation and Unemployment: A Tale of Two "Continents"," CESifo Working Paper Series 236, CESifo Group Munich.
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Cited by:
  1. Jim Malley & Hassan Molana, 2006. " The Relationship between Output and Unemployment with Efficiency Wages," CDMA Conference Paper Series 0607, Centre for Dynamic Macroeconomic Analysis.

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