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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.

Suggested Citation

  • Marco Guerrazzi, 2010. "How to Reduce Unemployment: Notes on Macro-Economic Stability and Dynamics," Discussion Papers 2010/106, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    • Handle: RePEc:pie:dsedps:2010/106
    Note: ISSN 2039-1854
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    File URL: https://www.ec.unipi.it/documents/Ricerca/papers/2010-106.pdf
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    References listed on IDEAS

    as
    1. Farmer, Roger, 2009. "Fiscal Policy Can Reduce Unemployment: But There is a Better Alternative," CEPR Discussion Papers 7526, C.E.P.R. Discussion Papers.
    2. Roger E. A. Farmer, 2012. "Confidence, Crashes and Animal Spirits," Economic Journal, Royal Economic Society, vol. 122(559), pages 155-172, March.
    3. Roger E. A. Farmer, 2008. "Aggregate demand and supply," International Journal of Economic Theory, The International Society for Economic Theory, vol. 4(1), pages 77-93, March.
    4. Varian, Hal R, 1977. " The Stability of a Disequilibrium IS-LM Model," Scandinavian Journal of Economics, Wiley Blackwell, vol. 79(2), pages 260-270.
    5. Roger E.A. Farmer, 2008. "Old-Keynesian Economics," Chapters, in: Roger E.A. Farmer (ed.), Macroeconomics in the Small and the Large, chapter 2, Edward Elgar Publishing.
    6. 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.
    7. 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.
    8. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    9. 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.
    10. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
    11. Menahem E. Yaari, 1965. "Uncertain Lifetime, Life Insurance, and the Theory of the Consumer," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 32(2), pages 137-150.
    12. Farmer, Roger, 2010. "Expectations, Employment and Prices," OUP Catalogue, Oxford University Press, number 9780195397901.
    13. Chang, Winston W & Smyth, David J, 1972. "Stability and Instability of IS-LM Equilibrium," Oxford Economic Papers, Oxford University Press, vol. 24(3), pages 372-384, November.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Old Keynesian Economics; ME-NA Schedules; Short-Run Macroeconomic Fluctuations.;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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