Unemployment, Underemployment, and Secular Stagnation in a Small Open Economy

Ken-ichi Hashimoto, Yoshiyasu Ono and Matthias Schlegl

ISER Discussion Paper from Institute of Social and Economic Research, The University of Osaka

Abstract: In this paper, we develop a small open economy model of secular stagnation that allows for both unemployment and underemployment. While unemployment results from the standard search and matching friction, underemployment in the form of an involuntary shortfall of working hours occurs under stagnation when households have a strong desire to save in the form of insatiable liquidity preferences. This secular stagnation equilibrium is characterized by persistent deflation and aggregate demand shortage. In this steady state, an improvement in the terms of trade reduces global demand for domestic products and lowers working hours, thereby exacerbating deflation and decreasing consumption and aggregate demand. Consequently, firm profits fall and unemployment worsens. These results are in sharp contrast to the case of a non-stagnant economy, where an improvement in the terms of trade increases consumption without affecting the employment rate.

Date: 2025-05
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Persistent link: https://EconPapers.repec.org/RePEc:dpr:wpaper:1285

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