Aggregate Demand and Micro Behavior: A New Perspective on Keynesian Macroeconomics

Steven Mark Fazzari (), Piero Ferri and Edward Greenberg
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Piero Ferri: The Jerome Levy Economics Institute
Edward Greenberg: The Jerome Levy Economics Institute

Macroeconomics from EconWPA

Abstract: We analyze the microfoundations for Keynesian aggregate demand effects by considering the link between aggregate demand and firm production decisions under monopolistic competition. Macroeconomic equilibrium is characterized in a simple graphical framework that facilitates comparison of several major approaches to modeling Keynesian microfoundations, including equilibrium theories, "new Keynesian" sticky price models, and more traditional sticky wage approaches. We use this framework to develop an original perspective on aggregate demand effects according to which aggregate demand shocks directly affect the demand conditions and production choices of individual firms. The results require neither nominal rigidity nor expectation errors. Nominal disinflation is ineffective in offsetting the real effects of demand shocks if aggregate demand is insensitive to nominal prices.

JEL-codes: E (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pke
Date: Written 1999-02-05
Note: Type of Document - Acrobate PDF File; prepared on IBM PC; to print on PostScript; pages: 40; figures: included
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http://129.3.20.41/eps/mac/papers/9902/9902005.pdf (application/pdf)

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