A Generalized Theory of Output Determination

Abstract

The literature on economic activity and unemployment in recent years contains several references to the possibility that high unemployment and low, relative to a trend, levels of output can be linked with capital shortages. Goudie and Meeks (1988, 1991) have argued that company bankruptcies may well (depending on how the firm is disposed of) produce large discontinuous drops in employment and output. Bruno and Sachs (1985), van der Ploeg (1987), and Burda (1988) have all examined the impact of adverse demand and supply shocks on capital stock and its further consequences on the economy as a whole from a neoclassical perspective. Blanchard (1988) has also explored the possibility that a sustained period of unemployment may lead to capital reduction and therefore to an increase in the equilibrium levels of unemployment. Van de Klundert and van Schaik (1990) analyze the impact of demand shocks on the capital stock and thence output within a Keynesian framework with price inertia. Rowthorn (1994) develops a model to examine the role of capital stock within a NAIRU framework and concludes that low investment has been a significant factor behind the rise in unemployment in Western Europe and that a major reduction in unemployment will require large-scale investment. Ballabriga et al. (1993), in empirical work based on a disequilibrium model, suggest capital constraints have periodically been important in Spain and that up to one-third of Spanish unemployment is due to structural factors. Finally, Bean (1994) has shown that in Europe the relationship between unemployment and capacity utilization has shifted outward since 1967. This contrasts sharply with the experience in the United States, where the relationship between capacity utilization and unemployment has been relatively stable. The European experience is consistent with capital scrapping in recessions reducing potential output. More references will be