Persistent Disequilibrium Dynamics and Economic Policy
Disequilibrium phenomena seem to be common occurrences of many advanced economies. Starting with the Great Depression, the high unemployment rates in Europe spanning over a decade since the mid-1970s, or the high inflation over the 1980s are just prominent examples. The Japanese recession started in the mid-1990s and not yet fully resolved has put the combination of unemployment and deflation on the spotlight, making clear that a liquidity trap cannot be easily discarded as a purely theoretical possibility. Most recently, the current global recession prompted by the financial sector crisis seems to share similar features, and many observers and policy makers are invoking Keynesian type remedies.
Nonetheless, many economists still consider the representative agent flexible price model as the workhorse of macroeconomics, despite its conclusions are irremediably at odds with all the evidence on the persistence of disequilibrium phenomena (see, e.g., Blanchard, 2000).
KeywordsMonetary Policy Business Cycle Real Wage Aggregate Demand Nominal Wage
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