Natural rate of unemployment and efficiency: A dynamic analysis with flexible prices and increasing returns
AbstractWe present a continuous time non tatonnement process for frictionless and perfectly competitive markets with (possibly non convex) production, where the natural rate of unemployment (NRU) emerges as the asymptotic value of unemployment. Consumers and producers are myopic and repeatedly participate in Mertens' (2003) limit-price mechanism. We show that underemployment and unsold inventories can survive along the solution paths of our dynamics-the hallmark of the failure of Say's law. The following paradox appears: A nonzero NRU is compatible with Pareto optimality; conversely, full employment is compatible with sub optimality. Nevertheless, each trade and production path of our price quantity dynamics converges to some infinitesimal Pareto optimal point as long as there are no unsold inventories at the limit.
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Bibliographic InfoPaper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2008fe02.
Date of creation: 2008
Date of revision:
Underemployment; Say's law; inventories; non convex production;
Other versions of this item:
- Gaël Giraud & Céline Rochon, 2007. "Natural rate of unemployment and efficiency : a dynamic analysis with flexible prices and increasing returns," Documents de travail du Centre d'Economie de la Sorbonne b07022, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
- E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-09 (All new papers)
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