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Geographical Space And Effective Demand Under Stagnation

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    This paper investigates the adjustment mechanism between geographical space and effective demand under stagnation by constructing a spatial model with stagnation included. The model takes the idea of stagnation in Ono (2001) and combines it with the spatial model of Perera-Tallo (2003). The spatial model features local monopolists that import intermediate goods from other monopolists at a cost that can be decreased through investment. Using the integrated model, we reach the following conclusion: the wider the geographical space, the lower the effective demand under stagnation. This mechanism is explained as follows. Under stagnation, where demand has reached an upper bound, a decrease in the marginal cost of reaching distant intermediate suppliers reduces employment. The reason is 'love of variety' in production: for given final output, more variety of available intermediate inputs crowds out per-variety demand of intermediates and thus employment. Decreases in employment then lead to a decrease in the rate of time preference through a rise in the deflation rate, and thereby decrease the desire for consumption, consequently cutting effective demand. Copyright 2006 The Authors Journal compilation 2006 Blackwell Publishing Ltd/University of Adelaide and Flinders University .

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    Article provided by Wiley Blackwell in its journal Australian Economic Papers.

    Volume (Year): 45 (2006)
    Issue (Month): 4 (December)
    Pages: 286-298

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    Handle: RePEc:bla:ausecp:v:45:y:2006:i:4:p:286-298
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