On Estimating the Effects of Events like the Asian Financial Crisis

Abstract

Traditional macroeconomics cannot explain why and how could financial events like the East Asian financial crisis affect the real economies. This papers show that mesoeconomic analysis can explain such effects. Mesoeconomics combines micro, macro and simple general equilibrium analysis by concentrating on a representative firm which need not be perfectly competitive. A change in nominal aggregate demand or even just expectation may affect real output, contrary to the money neutrality results of the Monetarists and the New Classical Macroeconomists. The effects depend not only exogenous changes in demand and costs, but also on endogenous responses such as the responses of costs to the output of the firm, aggregate output, and the price level, and changes in the price elasticity of demand. Estimates of the values of these endogenous responses may be helpful in future estimates of the effects of exogenous changes. The paper also explains the difficulty of making economic forcasts.