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Geographical Space And Effective Demand Under Stagnation

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  • WATARU JOHDO

Abstract

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 .

Suggested Citation

  • Wataru Johdo, 2006. "Geographical Space And Effective Demand Under Stagnation," Australian Economic Papers, Wiley Blackwell, vol. 45(4), pages 286-298, December.
  • Handle: RePEc:bla:ausecp:v:45:y:2006:i:4:p:286-298
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    Cited by:

    1. Yoshiyasu Ono, 2010. "Trade Policy, Exchange Rate Adjustment and Unemployment," Chapters,in: Globalization and Economic Integration, chapter 7 Edward Elgar Publishing.
    2. Ryuā€ichiro Murota & Yoshiyasu Ono, 2012. "Zero Nominal Interest Rates, Unemployment, Excess Reserves And Deflation In A Liquidity Trap," Metroeconomica, Wiley Blackwell, vol. 63(2), pages 335-357, May.
    3. Ken-ichi Hashimoto, 2015. "Tariffs, Offshoring and Unemployment in A Two-Country Model," The Japanese Economic Review, Japanese Economic Association, vol. 66(3), pages 371-392, September.
    4. Yoshiyasu Ono, 2014. "Macroeconomic interdependence between a stagnant and a fully employed country," ISER Discussion Paper 0893rr, Institute of Social and Economic Research, Osaka University, revised Feb 2017.
    5. Yoshiyasu Ono, 2015. "Growth, Secular Stagnation and Wealth Preference," ISER Discussion Paper 0946, Institute of Social and Economic Research, Osaka University.
    6. Yoshiyasu Ono & Junichiro Ishida, 2014. "On Persistent Demand Shortages: A Behavioural Approach," The Japanese Economic Review, Japanese Economic Association, vol. 65(1), pages 42-69, March.
    7. Yoshiyasu Ono, 2014. "International Economic Interdependence and Exchange-rate Adjustment under Persistent Stagnation," The Japanese Economic Review, Japanese Economic Association, vol. 65(1), pages 70-92, March.
    8. Murota, Ryu-ichiro & Ono, Yoshiyasu, 2015. "Fiscal policy under deflationary gap and long-run stagnation: Reinterpretation of Keynesian multipliers," Economic Modelling, Elsevier, vol. 51(C), pages 596-603.

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