Abstract
We develop a very simple aggregate demand analysis of a small open economy that suffers from secular demand stagnation. It looks like the conventional Keynesian cross analysis but considers dynamically optimizing behavior of households and firms, international capital movement, and the current account adjustment. We find that parameter changes that improve the current account yield an appreciation pressure on the home currency and decrease demand for the home commodity and labor. Consequently, they worsen deflation and decrease consumption and income. This result is quite opposite to that under full employment. For example, an exogenous rise in the price of the home commodity decreases employment, consumption and income. If a country owns greater foreign assets, it suffers from less employment, consumption and income.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
