A Theoretical Framework for Law and Macroeconomics

30 Pages Posted: 28 Oct 2016 Last revised: 13 Jan 2017

Date Written: October 27, 2016

Abstract

This Article considers the effects of law within a Keynesian macroeconomic model on the economy. Using the IS/LM model at the heart of “short-run” macroeconomics, I argue that law affects spending (“aggregate demand”) and that the changes in spending induced by law can affect output. I contrast the law and macroeconomic perspective with the law and microeconomic approach that has dominated law and economics. I demonstrate that law’s effects on aggregate demand become particularly important when monetary policy is constrained by the “zero lower bound” on nominal interest rates. At the zero lower bound, interest rates cannot adjust to bring aggregate demand into balance with the economy’s supply potential. Economic output falls short of its potential due to inadequate demand. At the zero lower bound, I argue that some micro-economically disfavored legal instruments, such as command and control regulation crafted to increase spending, become appealing relative to seemingly superior alternative instruments such as Pigovian taxation.

Keywords: Macroeconomics, Law, Taxation, Regulation, Keynes, Stimulus

JEL Classification: E1, E3, E4, E6, K1, K2, K3, K4

Suggested Citation

Listokin, Yair, A Theoretical Framework for Law and Macroeconomics (October 27, 2016). Yale Law School, Public Law Research Paper No. 586; Yale Law & Economics Research Paper No. 567. Available at SSRN: https://ssrn.com/abstract=2860283 or http://dx.doi.org/10.2139/ssrn.2860283

Yair Listokin (Contact Author)

Yale Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States
203-436-2567 (Phone)

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