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How to Reduce Unemployment: Notes on Macro-Economic Stability and Dynamics

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  • Marco Guerrazzi

Abstract

In this paper, I explore the out-of-equilibrium macro-economic dynamic behaviour of the Farmer’s (2010d) ME-NA model. Specifically, preserving the assumption that microeconomic adjustments are instantaneous, I build a dynamic model in continuous time that describes the macro-economic adjustments of the value of output and the interest rate. Within this framework, I show that the model economy has a unique stationary solution whose dynamics is locally stable. Moreover, simulating the model economy under the baseline calibration, I show that the adjustments towards the steady-state equilibrium occur through endogenous convergent oscillations while the most promising way out from a finance-induced recession combines a fiscal expansion with interventions aimed at altering the trade-off between holding risky and safe assets.

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Paper provided by Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy in its series Discussion Papers with number 2010/106.

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Date of creation: 10 Oct 2010
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Handle: RePEc:pie:dsedps:2010/106

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Keywords: Old Keynesian Economics; ME-NA Schedules; Short-Run Macroeconomic Fluctuations.;

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  1. Paolo Gelain & Marco Guerrazzi, 2010. "A DSGE Model from the Old Keynesian Economics: An Empirical Investigation," CDMA Working Paper Series 201014, Centre for Dynamic Macroeconomic Analysis.
  2. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Farmer, Roger, 2010. "Expectations, Employment and Prices," OUP Catalogue, Oxford University Press, number 9780195397901, Octomber.
  4. Roger E. A. Farmer, 2007. "Aggregate Demand and Supply," NBER Working Papers 13406, National Bureau of Economic Research, Inc.
  5. Roger E. A. Farmer, 2011. "Confidence Crashes and Animal Spirits," 2011 Meeting Papers 603, Society for Economic Dynamics.
  6. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  7. Farmer, Roger E.A., 2010. "How to reduce unemployment: A new policy proposal," Journal of Monetary Economics, Elsevier, vol. 57(5), pages 557-572, July.
  8. Chang, Winston W & Smyth, David J, 1972. "Stability and Instability of IS-LM Equilibrium," Oxford Economic Papers, Oxford University Press, vol. 24(3), pages 372-84, November.
  9. Varian, Hal R, 1977. " The Stability of a Disequilibrium IS-LM Model," Scandinavian Journal of Economics, Wiley Blackwell, vol. 79(2), pages 260-70.
  10. Farmer, Roger E A, 2009. "Fiscal Policy Can Reduce Unemployment: But There is a Better Alternative," CEPR Discussion Papers 7526, C.E.P.R. Discussion Papers.
  11. Marco Guerrazzi, 2010. "Stochastic Dynamics and Matching in the Old Keynesian Economics: A Rationale for the Shimer's Puzzle," Discussion Papers 2010/95, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
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