Full Employment Equilibrium Research Articles

The stability of equilibrium in a model with a government budget restraint and endogenous bonds

General conditions are given for asymptotic stability of full-employment equilibrium in a model with a government budget restraint and endogenous bonds. It is argued that even in the particular case where real government spending on goods is a datum the conditions are not obviously implausible.

Effective Demand Failures Revisited

In this paper, we investigate the stability of full-employment equilibria. This question is cast in a general equilibrium model where aggregate variables are present at the micro level. We establish the existence of a class of economies where there is only a single-full-employment -equilibrium. Furthermore, this unique equilibrium is globally stable. This set of economies contains the set of Pareto optima. By moving away from the Pareto optima, bifurcations emerge and complicate the structure of the set of equilibria and their stability properties. For example, the first bifurcation yields economies with at least one locally stable full-employment equilibrium. Further bifurcations lead to more complex, chaotic situations.

The Aggregate Supply Curve: Keynes and Downwardly Sticky Money Wages

Keynes opened his General Theory of Employment, Interest and Money with a number of well-argued point-by-point rejections of the tenets of the classical theory of employment, the theory that held that the supply and demand for labor automatically positions the economy at a unique full-employment equilibrium. With orthodox theory cleared away in Chapter 2, Keynes devoted the remaining chapters of his book to the explication of his own revolutionary theory of employment (Davidson, 1984). Of the several charges Keynes levied against orthodox theory, one in particular has been subject to much misunderstanding and needless argumentation. The particular criticism I refer to is Keynes's outright dismissal of the classical labor supply function on the grounds that money wages are downwardly stickythat in fact money wages are not perfectly flexible, as assumed in classical theory. Elementary and intermediate textbook authors have generally acknowledged the correctness of Keynes's view that money wages are downwardly sticky. However, these authors do not explain why money wages are sticky, nor do they incorporate the full significance of sticky wages into their analyses of the aggregate supply curve. Consequently, their full macroeconomic models are incorrectly specified, and the conclusions they draw concerning the response of prices and wages to prior changes in aggregate demand are apt to be misleading or incorrect. In the first part of this paper, I briefly review Keynes's explanation of both the rationale underlying downwardly sticky money wages and the consequences this phenomenon has for macroeconomic theory. In the next section, I contrast the textbook treatment of the aggregate supply curve with one that is more appropriate to the economy in which we live, an economy in which money wages are downwardly sticky.

Market power and unemployment

This paper explores the under-consumptionist idea that market power can preclude the existence of a full employment equilibrium within the framework of the modern theory of economic growth. It is shown that the introduction of market power can indeed eliminate the full employment equilibrium. In an attempt to assess the importance of this possibility maximum values for the market power parameters consistent with a full employment equilibrium existing are computed. In some plausible cases these maxima are uncomfortably low suggesting that market power has significant potential for causing unemployment.

Inventories in a dynamic macro model with flexible prices

This paper presents a disequilibrium macro model with inventories, rational expectations, and flexible prices. It is found that less than full employment equilibria are possible, even highly likely, in the intermediate term and that wage reductions will cause employment to drop. Increasing aggregate demand will raise employment only if it is done gradually. On a technical level, we have multiple switching lines, disconnected regimes, and a connected equilibrium set which borders on a switching Iline and otherwise lies in a single region.

Countercyclical versus Passive Monetary Policy in a Medium-Run Macro Model

A macro model of an inflationary economy incorporating the government budget constraint is set up to analyze two alternative monetary policy regimes: a passive policy and an active countercyclical policy. It is found that the policy is potentially unstable, especially when monetarist parameter values prevail, whereas the local stability of fullemployment equilibrium can always be ensured by choosing an appropriate countercyclical feedback rule for the monetary growth rate. An active monetary policy can also smooth out the business cycle in the neighborhood of equilibrium, but in accordance with Leijonhufvud's corridor hypothesis, instability may occur when output is pushed sufficiently far below its full-employment level.

Stabilization policy under flexible exchange rates and liquidity

A two country model under flexible exchange rates is developed. The model shows that changes in the interest rate resulting from monetary or fiscal expansion has indeterminant effects on prices, output, capital flows and liquidity demand for money under conditions of a less than full employment equilibrium. Stabilization policy recommendations previously respected in this context fall under suspicion.

Asset Accumulation and Economic Activity

In this work James Tobin discusses two major issues of macroeconomics: the strength of automatic market forces in maintaining full employment equilibrium and the efficacy of government fiscal and monetary policies in stabilizing the economy.

Asset Accumulation and Economic Activity.

In this work James Tobin discusses two major issues of macroeconomics: the strength of automatic market forces in maintaining full employment equilibrium and the efficacy of government fiscal and monetary policies in stabilizing the economy.

LDCs versus DCs: Trade and Growth

Our aim is to analyse patterns of international trade and economic growth in connection with the North‐South income gap. The analysis is based on the familiar two‐factor, two‐sector, two‐country model adapted to the specific situation in question. Less developed countries, LDCs, are characterised by a low level of capital per head and a low productivity level compared with developed countries, DCs. Massive hidden or overt unemployment is supposed to be another feature of poor countries. The full employment equilibrium wage rate lies then below the subsistence level, which is characteristic of a labour‐surplus economy. By introducing a distortion in the form of a fixed real wage level in LDCs we can make use of the results obtained by Brecher (1974) with regard to the pure theory of international trade. The main difference from Brecher's analysis, apart from our specific interpretation, is the emphasis we put on economic growth. For that reason we have to consider a number of specialisation patterns which may emerge in the course of time. These and other links between trade and growth are dealt with in a number of papers in the economic literature. As Takayama (1972) shows, the main concern of the authors in this field is uniqueness and stability of equilibrium growth. Although we have something to say on the long‐term properties of our model, stability analysis will not be the central issue.

Behavioral rules and sequences of macroequilibria

This paper compares the dynamic consequences of several diferent behavioral rules involving price or quantity adjustments in a temporary equilibrium, macroeconomic framework. The central rule studied is the widely practiced, cost mark-up, administered pricing rule. A competitive, quantity adjustment rule based on a target rate of return is also examined. These are contrasted with monopolistic, profit maximizing price and quantity adjusting rules. Although the analysis represents but an initial foray into the territory where the interests of behavioral and macroeconomic theories overlap, the results, which trace stagflation to instabilities in ‘permanent’, full-employment equilibrium, suggest that further work in this direction may improve our understanding of present inflationary phenomena.

Wages and employment in Indian agriculture

The paper seeks to analyse, at both theoretical and empirical levels, the process of determination of the wage rate and the quantum of employment of casual agricultural labourers in India. It is argued that the daily wage rate implicit in the annual wage of an attached labourer, determined probably on the basis of a notion of subsistence, operates as the norm for fixing the minimum daily wage of a casual labourer. This minimum wage need not, and usually does not, clear the market in casual labour. However, during certain busy periods, the casual labour market approaches a full-employment equilibrium, and the wage rate rises above the minimum level. Such a process has two important implications: (i) there arises a wage-gap, i.e. the actual wage rate tends to be higher than the expected wage income per unit of labour offered in the market;and (ii) an increase in the overall demand for labour does not necessarily lead to a higher wage rate.

PRICE-QUANTITY ADJUSTMENTS IN A MACRO-DISEQUILIBRIUM MODEL

This paper studies the dynamic properties of a simple macro-economic model where exchange takes place outside equilibrium. It introduces an explicit treatment of the way the economic agents form sales expectations over time and specifies price and wages adjustments. This allows an analysis of the price-quantity dynamics of an ongoing Neo-Keynesian economy. The global stability properties of the full employment equilibrium are established although Keynesian results characterize the short run. Unemployment equilibria can only occur when extreme cases of pessimistic expectations are considered.

The Limits to Stability of a Full-Employment Equilibrium

This paper addresses question of stability of a full-employment equilibrium. In particular it examines notion, recently proposed by Leijonhufvud (1973) that a full-employment equilibrium is locally stable but globally unstable. Leijonhufvud called this neighbourhood of stability the corridor, and suggested several reasons for believing in its likely existence. The notion has yet to find concrete embodiment in any precisely articulated economic model, and Grossman (1974) has suggested good reasons for doubting that it will. The present paper is intended to clarify some of issues involved and to demonstrate some simple formal models in which such a corridor exists. Section I of paper contains a general discussion of notion of corridor. Section II investigates appropriate concept of stability. Sections III and IV contain examples, and Section V contains a summary and suggestions for future research.

The Multiplier Concept and Monetary Restraint: A Comment

Jack Vernon's recent paper in this Journal 1 argues that the ordinary money stock multiplier in a linear IS-LM model is inappropriate for evaluating the strength of monetary restraint in greater than full employment equilibrium. He considers the IS curve irrelevant beyond full employment real income and proposes a modified multiplier based on an expenditure function with no induced consumption (or taxes) beyond full employment real income. Unfortunately, Vernon fails to consider the implied economic behavior of his analysis or to recognize its implications in terms of markets implicitly omitted in ordinary IS-LM analysis. The result is that his interpretation either is invalid or is inconsistent with economic behavior. According to Vernon, with the curve LM, in Figure I, the relevant

Growth Maximisation and the Firm's Investment Function

possibility of empirically discriminating between the two depends chiefly upon their respective predictions concerning the relationships between the firm's level of investment and parameters such as the interest rate and the rate of profits tax. Second, given the importance of the shape of the aggregate investment function for the existence or nonexistence of full-employment equilibrium and for the choice of appropriate government policy instruments, it is of interest to consider whether or not nonprofitmaximising behavior at the managerial level has any important implications for the position and elasticity of this key macroeconomic relationship. This article examines in detail the invest-

The Financing of Inflationary Gaps: Rejoinder

Previous articleNext article No AccessCommunicationsThe Financing of Inflationary Gaps: RejoinderGeorge HorwichGeorge Horwich Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by Journal of Political Economy Volume 80, Number 4Jul. - Aug., 1972 Article DOIhttps://doi.org/10.1086/259934 Views: 2Total views on this site Copyright 1972 The University of ChicagoPDF download Crossref reports no articles citing this article.

"Forced Saving" and the Rate of Interest

Previous articleNext article No AccessCommunications"Forced Saving" and the Rate of InterestM. PerlmanM. Perlman Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by Journal of Political Economy Volume 79, Number 2Mar. - Apr., 1971 Article DOIhttps://doi.org/10.1086/259754 Views: 5Total views on this site Copyright 1971 The University of ChicagoPDF download Crossref reports no articles citing this article.

On the Stability of Full Employment Equilibrium

On the Stability of Full Employment Equilibrium

A Note on Short-Run Employment and Real Wage Rate Under Competitive Commodity Markets

THIS PAPER EXPLORES the effects upon aggregate employment and the real wage rate of a decline of aggregate demand in two economies in which the commodity market is competitive. In the first economy, all goods just produced are supplied to the market perfectly inelastically, the costs of storage being too great to warrant the holding of stocks at any non-negative market price. In the second type of economy, holding costs are low enough that producers will carry over some stock into the next market period when the current market price is low enough on the speculation that future sales will be possible at a higher price. This latter model has been studied by Edwin Mills [7, (chapter 4)] and Edward Zabel [9], and it will be supposed here that firms follow the optimal production and sales policies derived by Zabel [9]. Consider a decrease of aggregate demand for commodities which does not prevent the continued existence of a full-employment equilibrium. Under what conditions concerning the dynamics of the system will the fall of aggregate demand cause involuntary unemployment, at least transitionally? In particular, is a failure of money wages immediately to fall in proportion to the price level (at any given level of employment) a necessary condition for involuntary unemployment? That is, will involuntary unemployment occur only if the fall of aggregate demand causes a rise of the real wage rate? This is the principal question to be studied in this paper.