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Aggregate Demand and Micro Behavior: A New Perspective on Keynesian Macroeconomics

  • Steven M. Fazzari

    (The Jerome Levy Economics Institute)

  • Piero Ferri

    (The Jerome Levy Economics Institute)

  • Edward Greenberg

    (The Jerome Levy Economics Institute)

We analyze the microfoundations for Keynesian aggregate demand effects by considering the link between aggregate demand and firm production decisions under monopolistic competition. Macroeconomic equilibrium is characterized in a simple graphical framework that facilitates comparison of several major approaches to modeling Keynesian microfoundations, including equilibrium theories, "new Keynesian" sticky price models, and more traditional sticky wage approaches. We use this framework to develop an original perspective on aggregate demand effects according to which aggregate demand shocks directly affect the demand conditions and production choices of individual firms. The results require neither nominal rigidity nor expectation errors. Nominal disinflation is ineffective in offsetting the real effects of demand shocks if aggregate demand is insensitive to nominal prices.

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File URL: http://128.118.178.162/eps/mac/papers/9902/9902005.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 9902005.

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Length: 40 pages
Date of creation: 05 Feb 1999
Date of revision:
Handle: RePEc:wpa:wuwpma:9902005
Note: Type of Document - Acrobate PDF File; prepared on IBM PC; to print on PostScript; pages: 40; figures: included
Contact details of provider: Web page: http://128.118.178.162

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  1. James Tobin, 1991. "Price Flexibility and Output Stability: An Old Keynesian View," Cowles Foundation Discussion Papers 994R, Cowles Foundation for Research in Economics, Yale University, revised Sep 1991.
  2. Weitzman, Martin L, 1982. "Increasing Returns and the Foundations of Unemployment Theory," Economic Journal, Royal Economic Society, vol. 92(368), pages 787-804, December.
  3. Tobin, James, 1975. "Keynesian Models of Recession and Depression," American Economic Review, American Economic Association, vol. 65(2), pages 195-202, May.
  4. Schmalensee, Richard, 1988. "Industrial Economics: An Overview," Economic Journal, Royal Economic Society, vol. 98(392), pages 643-81, September.
  5. Gordon, Robert J, 1990. "What Is New-Keynesian Economics?," Journal of Economic Literature, American Economic Association, vol. 28(3), pages 1115-71, September.
  6. Michael Woodford, 1990. "Self-Fulfilling Expectations and Fluctuations in Aggregate Demand," NBER Working Papers 3361, National Bureau of Economic Research, Inc.
  7. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  8. Peter Howitt, 1986. "Wage Flexibility and Employment," Eastern Economic Journal, Eastern Economic Association, vol. 12(3), pages 237-242, Jul-Sep.
  9. Bruce Greenwald & Joseph E. Stiglitz, 1993. "New and Old Keynesians," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 23-44, Winter.
  10. De Long, James Bradford & Summers, Lawrence H, 1986. "Is Increased Price Flexibility Stabilizing?," American Economic Review, American Economic Association, vol. 76(5), pages 1031-44, December.
  11. Balvers, Ronald J & Miller, Norman C, 1992. "Factor Demand under Conditions of Product Demand and Supply Uncertainty," Economic Inquiry, Western Economic Association International, vol. 30(3), pages 544-55, July.
  12. Hart, Oliver, 1982. "A Model of Imperfect Competition with Keynesian Features," The Quarterly Journal of Economics, MIT Press, vol. 97(1), pages 109-38, February.
  13. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
  14. Martin L. Weitzman, 1984. "The Simple Macroeconomics of Profit Sharing," Working papers 357, Massachusetts Institute of Technology (MIT), Department of Economics.
  15. Ian Domowitz & R. Glenn Hubbard & Bruce C. Petersen, 1986. "Business Cycles and the Relationship Between Concentration and Price-Cost Margins," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 1-17, Spring.
  16. Ramey, Valerie A, 1991. "Nonconvex Costs and the Behavior of Inventories," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 306-34, April.
  17. Akerlof, George A & Yellen, Janet L, 1985. "A Near-rational Model of the Business Cycle, with Wage and Price Intertia," The Quarterly Journal of Economics, MIT Press, vol. 100(5), pages 823-38, Supp..
  18. Mankiw, N Gregory, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 529-38, May.
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