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A Model of Aggregate Demand and Unemployment

  • Michaillat, Pascal
  • Saez, Emmanuel

We present a static model of aggregate demand and unemployment. The economy has a nonproduced good, a produced good, and labor. Product and labor markets have matching frictions. A general equilibrium is a set of prices, market tightnesses, and quantities such that buyers and sellers optimize given prices and tightnesses, and actual tightnesses equal posted tightnesses. In each frictional market, there is one more variable than equilibrium condition. To close the model, we take all prices as parameters. We obtain the following results: (1) unemployment and unsold production prevail in equilibrium; (2) each market can be slack, efficient, or tight if the price is too high, efficient, or too low; (3) product market tightness and sales are positively correlated under aggregate demand shocks but negatively correlated under aggregate supply shocks; (4) transfers from savers to spenders stimulate aggregate demand, product market tightness, and employment; (5) the government-purchase multiplier is positive when the economy is slack, zero when the economy is efficient, and negative when the economy is tight; (6) with unequal distribution of profits and labor income, a wage increase may stimulate aggregate demand and reduce unemployment.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9609.

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Date of creation: Aug 2013
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Handle: RePEc:cpr:ceprdp:9609
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  1. Montgomery, James D, 1991. "Equilibrium Wage Dispersion and Interindustry Wage Differentials," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 163-79, February.
  2. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum 37/1995, Oslo University, Department of Economics.
  3. Pascal Michaillat, 2012. "Do Matching Frictions Explain Unemployment? Not in Bad Times," American Economic Review, American Economic Association, vol. 102(4), pages 1721-50, June.
  4. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2013. "Optimal unemployment insurance over the business cycle," LSE Research Online Documents on Economics 58321, London School of Economics and Political Science, LSE Library.
  5. Roger E. A. Farmer, 2007. "Aggregate Demand and Supply," NBER Working Papers 13406, National Bureau of Economic Research, Inc.
  6. Greg Kaplan & Guido Menzio, 2013. "Shopping Externalities and Self-Fulfilling Unemployment Fluctuations," Working Papers 1461, Princeton University, Department of Economics, Center for Economic Policy Studies..
  7. Diamond, Peter A, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 217-27, April.
  8. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March.
  9. Benassy, Jean-Pascal, 1993. "Nonclearing Markets: Microeconomic Concepts and Macroeconomic Applications," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 732-61, June.
  10. repec:spo:wpecon:info:hdl:2441/5l6uh8ogmqildh09h481p4obg is not listed on IDEAS
  11. Mortensen, Dale T, 1982. "Property Rights and Efficiency in Mating, Racing, and Related Games," American Economic Review, American Economic Association, vol. 72(5), pages 968-79, December.
  12. Etienne Wasmer, 2011. "A steady-state model of a non-walrasian economy with three imperfect markets," Sciences Po publications info:hdl:2441/5l6uh8ogmqi, Sciences Po.
  13. Valerie A. Ramey, 2011. "Can Government Purchases Stimulate the Economy?," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 673-85, September.
  14. Gauti B. Eggertsson & Paul Krugman, 2012. "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 127(3), pages 1469-1513.
  15. Lehmann, Etienne & Van Der Linden, Bruno, 2010. "Search Frictions On Product And Labor Markets: Money In The Matching Function," Macroeconomic Dynamics, Cambridge University Press, vol. 14(01), pages 56-92, February.
  16. Robert E. Hall, 2008. "General Equilibrium with Customer Relationships: A Dynamic Analysis of Rent-Seeking," 2008 Meeting Papers 312, Society for Economic Dynamics.
  17. Ven Der Linden B. & Lehmann E., 2006. "Search Frictions on Product and Labor markets," Working Papers ERMES 0604, ERMES, University Paris 2.
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