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interaction between demand for labor and consumption over the business cycle

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  • Wouter Den Haan

    (London School of Economics)

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    Abstract

    This paper develops a framework with a standard labor market matching friction and a friction in commodities markets which leads to firms not always selling everything being produced and thus to inventory accumulation. A savings glut can lead to a downward spiral in which reductions in consumer demand and demand for workers reinforce each other. Key is that the need for firms to finance inventories provides an outlet for the additional savings, so that there is no or not enough downward pressure on interest rates to kill the savings glut. These results do not require sticky prices and/or sticky wages.

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    File URL: http://www.economicdynamics.org/meetpapers/2012/paper_272.pdf
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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 272.

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    Date of creation: 2012
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    Handle: RePEc:red:sed012:272

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