Abstract
We develop a money-in-the-utility-function model with two features. One is that a Phillips curve relationship between nominal wages and unemployment appears because of efficiency wages. The other is that as in the Japanese economy since the early 1990s, unemployment attributable to aggregate demand deficiency arises even in the long run. We analyze the effect of an employment subsidy in this long-run stagnation and show that an increase in the subsidy may worsen aggregate demand deficiency and unemployment.
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