Lower Aggregate Demand Research Articles

The New Normal? The European Union’s Temporary Frameworks for State Aid

Abstract It is widely agreed that the global economy has entered a phase of heightened uncertainty. Since all downturns and slowdowns involve low aggregate demand, the authorities typically step in by increasing their own spending to protect businesses and jobs. During the Covid pandemic the European Union has witnessed an unprecedented level of State aid measures, under the hastily adopted dedicated temporary framework. Temporary rules have also been adopted to facilitate State aid supporting companies affected by the Russian invasion of Ukraine, which are still in force today (March 2023). The common pattern of crisis responses in turn allows for a more general, non-event-specific, assessment of State aid measures taken to reduce economic disturbances. Sufficient time has now passed for an attempt to take stock of these efforts. This paper therefore seeks to assess State aid measures designed to remedy serious economic disruptions, identify their weak points and recommend improvements. The analysis, preceded by a succinct description of the European Union’s State aid toolbox for crisis aid, will focus on the previously identified potential problem areas: How to determine whether an aid measure is indeed capable, in itself, of remedying the serious disturbance in the economy, especially when it is granted to a single undertaking, and how to ensure the effectiveness of State aid control. The paper will conclude with a set of recommendations.

Why Has Italy Struggled So Much to Grow Economically Since 1990?

Italy is one of the worlds major economies, but it is also one of the most struggling major economies in terms of economic development. Especially after 1990, the Italian economy has faced a state of stagnation for a long time, and there has been no sign of improvement until now. The theme of this article is the reason for Italys economic struggle after 1990. Low exports, low domestic demand, and a manufacturing slump are the reasons that led to the Italian economic struggle. Low exports stemmed from joining the Eurozone and the capture of international markets by other countries. Low domestic demand was hit by the double blow of Eurozone accession and high unemployment caused by a closed labour market. And the dormancy of the manufacturing sector is related to the unemployment problem caused by the closed labour market and the lack of domestic demand. Insufficient exports, low aggregate demand, and a weak manufacturing sector are the three main reasons for the economys poor performance, which has led Italy to remain a struggling economy for more than 30 years.

Evidence-based cost estimation of essential medicines for pediatric cancer care in Peru.

e18533 Background: Inequitable access to essential medicines is a large contributor to the inferior outcomes experienced by children with cancer living in low-and-middle-income countries. In collaboration with the Peruvian Ministry of Health and the Pan American Health Organization, we aimed to predict annual aggregate drug costs as well as primary cost drivers for treating Peruvian children with cancer to inform more accurate and efficient drug procurement. Methods: FORxECAST is a pediatric cancer-specific model that projects required drug quantity and cost for 18 common pediatric cancers, drawing on internationally adopted standard treatment protocols. It is customizable to geographic region, local cancer incidence, stage distribution, and domestic drug prices. To estimate aggregate costs utilizing FORxECAST, Peruvian incidence, stage at diagnosis, and per-unit drug prices were provided by local stakeholders. FORxECAST-embedded standardized data for country-specific age, sex, and BSA sourced by the World Health Organization and the Global Childhood Cancer Microsimulation Model were used. To provide comparative analyses, aggregate costs adapted for Peruvian incidence were calculated utilizing reference drug prices available through the Management Sciences for Health (MSH) International Medical Products Price Guide. Results: FORxECAST projected Peruvian aggregate drug costs to be USD$1,672,795.47 annually, which was 47% less than expected by median MSH prices and represents 4% of the total Peruvian cancer care budget. 19 of 22 medicines were cheaper on a per-unit basis relative to MSH. Dactinomycin was the costliest per-unit agent but contributes to less than 2% of the overall budget due to low aggregate demand. Primary cost drivers were 6-mercaptopurine, intravenous methotrexate, and asparaginase, due to the large quantities needed for treatment of Peru’s most common pediatric cancer: acute lymphoblastic leukemia. However, because of their low per-unit prices, sensitivity analyses showed that the annual drug budget would remain lower than predicted by MSH, even if the per-unit price for these 3 agents increased by 50% (USD$2,431,550.71 vs. USD$3,099,401.31). Conclusions: The cost of procuring accurate quantities of essential pediatric cancer medicines to meet population-level need is a small percentage of the total cancer budget for the Peruvian healthcare system. Given the potential impact that improved drug access could have on pediatric cancer survival, these data can justify health systemic efforts to effectively earmark funds for pediatric cancer care and minimize risks of stockout. Our analyses also demonstrate the importance of incorporating context-specific drug prices when estimating domestic budget impact. Next steps include comparative analyses with neighboring health systems in Latin America to assess regional price variation and inform opportunities for pooled procurement.

Wealth Inequality and Endogenous Growth

Advanced economies have been experiencing productivity slowdowns, rising inequality, and low consumption-to-wealth ratios in recent decades. Using an analytically tractable endogenous growth model with heterogeneous households, I emphasize a channel that connects inequality with productivity growth through aggregate consumption demand and the returns to R&D. Given realistic increases in wealth (inclusive of income) inequality, the calibrated model generates transition dynamics featuring productivity slowdowns, low aggregate demand, and low real interest rates, consistent with the empirical trends. The welfare cost of rising inequality is substantial and is nearly equally split between changes in the consumption distribution and slow growth.

The Transmission Mechanisms and Impacts of Oil Price Fluctuations: Evidence from DSGE Model

This paper constructs an open economy dynamic stochastic general equilibrium (DSGE) model with oil to investigate the transmission mechanism and impact effects of oil price fluctuations driven by different factors on China’s macroeconomy using quarterly data from 1996 to 2019. The results show that the international crude oil supply-driven oil price decline promotes positive output growth in the short run through the positive cost effect of the supply channel, and the production regulation cost will dampen the incentive to invest in the new energy sector in the long run. Domestic economic development demand-driven oil price increases act on the demand channel, driving output and oil prices to fluctuate in the same direction, generating a negative real balance effect on the economy through the interest rate channel. The oil-specific demand driven by foreign nominal interest rate shocks is transmitted through the exchange rate channel, triggering imported inflation, lower aggregate demand, and lower output. Different sources of oil price fluctuations have different transmission mechanisms and thus differential effects. For this reason, based on the root causes of oil price fluctuations, policy recommendations to deal with international oil price fluctuations in the new situation are proposed at the supply level, demand level, and international level.

Unemployment Insurance in Macroeconomic Stabilization

Does the generosity of unemployment insurance (UI) have a role to play in macroeconomic stabilization? When inefficient fluctuations arise from nominal rigidities and constraints on monetary policy, I demonstrate that it does, owing to the interaction between UI and aggregate demand. From a positive perspective, a marginal increase in UI generosity affects output and employment through a redistribution effect on aggregate demand. From a normative perspective, two forces determine optimal generosity beyond the classic trade-off between insurance and incentives: an aggregate demand externality and an effect of low aggregate demand on the social cost of disincentives. The aggregate demand externality summarizes the welfare impact of the redistribution effect when the economy is slack; both are governed by the difference in marginal propensities to consume between the unemployed and employed. Quantitatively, a calibrated model with search frictions, incomplete markets, and a binding zero lower bound suggests that the 2008–13 UI benefit extensions in the U.S. had important stabilization effects through these channels. Compared to counterfactual benefit durations capped at 9 months in the calibrated model, the extensions to 22 months prevent a 2-5 percentage point rise in the unemployment rate and generate a strict Pareto improvement.

Unleashing Ukraine’s Economic Potential: Macroeconomic Multipliers from a Feedback Perspective

The purpose of the research is the empirical analysis andelaboration of the system dynamics approach to define and estimate the key drivers of the future macroeconomic stabilization and economic potential of the Ukrainian economy. The study used thegeneralization, systematization and grouping of data, methods of system analysis and synthesis as well as the system dynamics methods and models.Research results. The analysis of the development of the Ukrainian economy in comparison to the Polish economic situation has been completed. We confirmed the hypothesis that many of the initial economic problems in Ukraine – such as a low aggregate demand and export competitiveness – have been the cause of the exchange rate regime. Elaborated system dynamics models not only allow to analyze the feedback structure of a national economy but can also be used to verify the effectiveness of the different implications for the economic policymaking in Ukraine in the coming years.The results of this paper are mostly exploratory and need further, deeper research before conclusions can be used for policymakers in order to elaborate the economic strategy which leads to improvement of the economic potential of Ukraine in the short and long run.Conclusions. Based on the empirical analysis conducted on the realization of the two types of the system dynamic models with the focus on explaining the interrelationships between domestic consumption, aggregate demand, inflation, export competitiveness, and exchange rate fluctuations, it was shown that although the currency peg has had a positive impacts on Ukraine’s energy imports, many of the other economic problems in Ukraine, such as a low aggregate demand and export competitiveness, have had place. It was also confirmed that the passage to flexible exchange rate regime is one of the important drivers of the economic potential and the competitiveness reinforcing as well as achievement of macroeconomic stabilization, especially in the long run.Article received 27.04.2018

Aggregate effects of minimum wage regulation at the zero lower bound

The Fair Minimum Wage Act of 2007 increased the U.S. nominal minimum wage by 41%, just as interest rates hit the zero lower bound. I study the interaction of these events in a parsimonious extension of the sticky-price New Keynesian model with heterogeneous labor. A “minimum-wage augmented” Phillips Curve relates inflation to output and the real minimum wage, which I estimate with aggregate data. Consistent with theory, controlling for the real minimum wage reduces the effect of output on inflation and increasing the minimum wage is inflationary. I then calibrate the equilibrium model to match microeconomic elasticities of earnings with respect to the minimum wage. On aggregate, the ZLB’s contractionary effects are dampened because nominal wages cannot decline rapidly, thereby halting the deflationary spiral caused by low aggregate demand. The effect can be large - in the calibrated economy, GDP losses from the ZLB are cut by half, even though only 3% of earnings accrue to minimum wage earners. Furthermore, increasing the minimum wage at the ZLB is expansionary, generating expected accumulated output gains of 14%.

Aggregate Effects of Minimum Wage Regulation at the Zero Lower Bound

Abstract The Fair Minimum Wage Act of 2007 increased the U.S. nominal minimum wage by 41%, just as interest rates hit the zero lower bound. I study the interaction of these events in a parsimonious extension of the sticky-price New Keynesian model with heterogeneous labor. A “minimum-wage augmented” Phillips Curve relates inflation to output and the real minimum wage, which I estimate with aggregate data. Consistent with theory, controlling for the real minimum wage reduces the effect of output on inflation and increasing the minimum wage is inflationary. I then calibrate the equilibrium model to match microeconomic elasticities of earnings with respect to the minimum wage. On aggregate, the ZLB’s contractionary effects are dampened because nominal wages cannot decline rapidly, thereby halting the deflationary spiral caused by low aggregate demand. The effect can be large - in the calibrated economy, GDP losses from the ZLB are cut by half, even though only 3% of earnings accrue to minimum wage earners. Furthermore, increasing the minimum wage at the ZLB is expansionary, generating expected accumulated output gains of 14%.

Disentangling the Effects of a Banking Crisis: Evidence from German Firms and Counties

Lending cuts by banks directly affect the firms borrowing from them, but also indirectly depress economic activity in the regions in which they operate. This paper moves beyond firm-level studies by estimating the effects of an exogenous lending cut by a large German bank on firms and counties. I construct an instrument for regional exposure to the lending cut based on a historic, postwar breakup of the bank. I present evidence that the lending cut affected firms independently of their banking relationships, through lower aggregate demand and agglomeration spillovers in counties exposed to the lending cut. Output and employment remained persistently low even after bank lending had normalized. Innovation and productivity fell, consistent with the persistent effects. (JEL E32, E44, G01, G21, G32, R11, R23)

Macroeconomics After the Great Recession

The 17th Jacques Polak Annual Research Conference on Macroeconomics, held at the IMF in Washington on November 3–4, 2016, was organized around the theme of “Macroeconomics after the Great Recession” and celebrated Olivier Blanchard’s contributions to macroeconomics and the Fund. The frst set of conference papers appeared in the previous issue. Below we summarize the key contributions of the papers that appear in the current issue, the second and last of the issues based on this conference. The 2016 Mundell-Fleming lecture was delivered by Larry Summers, Olivier’s long-time friend, colleague and co-author. In his remarks, Larry revisits the problem of secular stagnation – protracted low aggregate demand in the face of low-interest rates. Larry frst articulated the concept of secular stagnation in the fall of 2013 on the same stage as a policy panelist at our 14th Annual Research Conference. Larry argues that the case for secular stagnation has only strengthened over time as the events since 2013 have tended to confrm its predictions and reject those of its critics. Acknowledging that this theory is far from providing a complete explanation of what has happened in the industrial world in recent years, he argues nonetheless that it ofers important insights and requires a rethinking of macroeconomic policy. Larry concludes by outlining the theory’s implications for monetary and fiscal policies

Youth Unemployment – Current Trend in the Labour Market?

Abstract The problem of youth unemployment is a global issue.It is important to deeper examine the issues of youth unemployment, because it has high extent to the social factor. High unemployment means a waste of limited resources and decelerates the long run growth potential of an economy in the result of lower incomes, hence lower aggregate demand and GDP growth rates. The aim of this paper is to clarify the dimensions of the youth unemployment problem by analysing the unemployment in the EU countries.Findings prove, that be employed does notmean that young people have jobs corresponding their qualifications.

Supply-Side Policies and the Zero Lower Bound

Supply-side policies can play a role in fighting a low aggregate demand that traps an economy at the zero lower bound (ZLB) of nominal interest rates. Reductions in mark-ups or future increases in productivity triggered by supply-side policies generate a wealth effect that pulls current consumption and output up. Since the economy is at the ZLB, increases in interest rates do not undo this wealth effect. The paper illustrates this mechanism with a New Keynesian model.

Theoretical Approaches to Understanding of Global Economic Crisis of 2008

While trying to understand the varying causes that brought the global financial system to its knees, it is hard to point out a finger at a single failure. By looking at the reasons of financial meltdown from different theoretical views it becomes easier to understand that the fault lies with many. Minsky’s view of inherent instability in capitalistic economies is understandable but Marx’s extreme interpretation of capitalism does not help the crisis in detail. While on one hand, monetarists are keen on controlling the money supply, Keynesians tend to favour national intervention blaming low aggregate demand over the crisis. Measures are being taken by the governments across the world by stimulating their economies’ aggregate demand in order to divert the recession. These steps indicate a revival of old-fashioned Keynesian macroeconomics which currently stands out as ‘the best theoretical view in understanding the current financial crisis.

Combining Keynes and Schumpeter. Ingvar Svennilson?s contribution to the Swedish growth school and modern economics

In a study of European growth in the interwar period, the Swedish economist Ingvar Svennilson integrated a Keynesian theory of demand-led cumulative growth with a Schumpeterian analysis of transformation. Today, Svennilson is seen, together with the Schumpeterian economists Johan Akerman and Erik Dahmen, as members of a unique Swedish growth school. A combination of Keynes and Schumpeter with Svennilson as a mediator has been facilitated by neo-Schumpeterian theories of demand-led innovations. But it has been obstructed by a hypothesis in the Schumpeterian tradition that productivity growth is stimulated by low aggregate demand and by Svennilson’s strong commitment to “Verdoorn’s Law” which actually is Svennilson’s Law. However, Svennilson’s analyses of the importance of short-run imbalances for economic growth and the existence of imperfect capital markets discriminating progressive new firms have direct equivalences in modern macroeconomics. Svennilson’s main contributions to economics of today are his syntheses between macroeconomic and structural analysis, short and long run theoretical perspectives and, more basically, between theoretical and empirical research.

Demand for Bank Lending by the Private Business Sector in Pakistan

This study estimates the demand for bank lending by the private business sector in Pakistan. For the purpose of analysis a three-step methodology is applied, that is, univariate analysis, multivariate cointegration analysis, and error correction mechanism. It is found that the individual series are difference stationary, and there is a long-run stable relationship between the variables. The preferred model, obtained by the application of the general-to-specific methodology is also found to be stable throughout the study period. The study shows that the output of business sector is an important determinant of the demand for bank credit in Pakistan, implying that to achieve the objective of monetary policy the behaviour of the output of business sector must not be ignored. Furthermore, the study shows that the rate of interest on bank advances is an important determinant of the demand of credit by the business sector. It implies that monetary authorities can move the flow of bank credit to the private sector while changing the interest rate charged on bank lending. The analysis has important implications: a tight monetary policy implies a high rate of real interest; a high rate of interest on bank lending negatively affects the demand for bank credit by the business sector (and the investment), which in turn leads to low aggregate demand and lower output. That is what has happened in Pakistan in the last decade.