By Frederick van Der Ploeg
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Extra resources for Advanced Lectures in Quantitative Economics
However, the locus drawn in Figure 8 is only the notional one and must be adjusted to take account of the state of the labour market. e. at points above the LL locus). 13) continues to apply. 12). Instead, it is given by: Y(q>P, w) = qyn(q, w)+pyt(p, w). 12), and so the effective locus must lie to the left of the notional locus NN in the unemployment region. However, it turns out that the slope of the effective 24 It may be checked that, if w and q are assumed to adjust according to tâtonnement mechanisms, then the equilibrium at A is globally stable.
Moreover, at points which do not lie on this locus, the failure of the labour market to clear by the normal wageadjustment mechanism has implications for the determination of the trade balance. This is of course the dual decision hypothesis of Clower (1965), whereby disequilibrium in one market (in this case, the labour market) spills over into the other market and influences the manner in which short-run equilibrium is determined there. Even though the process is relatively simple in this model (because there is no feedback from the goods market to the labour market), it is of interest to investigate it in some detail.
Since this is a huge topic, I will concentrate on only one aspect, namely, the implications of different assumptions about expectations formation for the efficacy of fiscal policy when Keynesian unemployment both prevails today and is expected to prevail in the future. 1, in which notional labour supply is fixed and no investment is carried out, suppose that the horizon of the model is extended to two Neo-Keynesian Macroeconomics in an Open Economy 47 W κ U Figure 15. Taxonomy of effective equilibria with investment.
Advanced Lectures in Quantitative Economics by Frederick van Der Ploeg