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Animal Spirits and Investment Complementarities in a Temporary Equilibrium model with Underemployment

Listed author(s):
  • Polat, Sezgin


    (Galatasaray University Economic Research Center)

This paper proposes a sequential macroeconomic model to study investment complementarities in the presence of un(der)employment. It also incorporates some assumptions generally used in Keynesian economics like animal spirits, cash-in-advance constraints and irreversibility of investment decisions. The construction of the model puts special emphasis on the role of investment decisions in the formation of business cycles.Our results provide support to the view that wage flexibility does not promise neither to dampen expectation-driven economic fluctuations nor to shorten the adjustment period. In the fix-price equilibrium, there appears a trade-of between unemployment and output volatility. When the wage formation is less sensitive to changes in past level of unemployment, less pronounced, the output volatility and more pronounced the unemployment volatility

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Paper provided by Galatasaray University Economic Research Center in its series GIAM Working Papers with number 10-1.

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Length: 38 pages
Date of creation: 14 Nov 2010
Date of revision: 2010
Handle: RePEc:ris:giamwp:2010_001
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