On Persistent Demand Shortages: A Behavioural Approach

28 Pages Posted: 21 Feb 2014

See all articles by Yoshiyasu Ono

Yoshiyasu Ono

Osaka University - Institute of Social and Economic Research (ISER)

Date Written: March 2014

Abstract

We incorporate two sets of behavioural assumptions, fairness concerns and insatiable desire for money, into a dynamic optimization model to illuminate how they can generate persistent aggregate demand shortages. We obtain the conditions for persistent unemployment and temporary unemployment. Policy implications differ significantly between the two cases. A monetary expansion raises private consumption under temporary unemployment but not under persistent unemployment. A fiscal expansion may or may not increase short‐run private consumption but crowds out long‐run consumption under temporary unemployment. Under persistent unemployment, however, a fiscal expansion always increases private consumption. The “paradoxes of toil and flexibility” also appear.

JEL Classification: E52, E31

Suggested Citation

Ono, Yoshiyasu, On Persistent Demand Shortages: A Behavioural Approach (March 2014). Japanese Economic Review, Vol. 65, Issue 1, pp. 42-69, 2014. Available at SSRN: https://ssrn.com/abstract=2399259 or http://dx.doi.org/10.1111/jere.12016

Yoshiyasu Ono (Contact Author)

Osaka University - Institute of Social and Economic Research (ISER) ( email )

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan

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