Constraint-State Identification as the Prior Operation in Macroeconomic Analysis

Haisong Bao

MPRA Paper from University Library of Munich, Germany

Abstract: Modern macroeconomics increasingly fails to explain or predict major economic outcomes — from persistent stagnation despite monetary expansion to the coexistence of asset inflation and price stability, from the ineffectiveness of demand stimulus to the paradox of high savings alongside weak investment. This paper argues that these failures share a common root: mainstream analysis defaults to a supply-constrained baseline and treats demand deficiency as a temporary deviation, when in fact mature economies can exist in a qualitatively different structural state — demand constraint — for extended periods. The paper proposes that constraint-state identification should be the first-order analytical operation, prior to any policy prescription. Under supply constraint, savings convert to investment, money approximates neutrality, and standard recovery mechanisms operate. Under demand constraint, savings systematically exceed productive investment capacity, money flows to asset systems, and policy tools behave oppositely. The framework clarifies why decades of policy intervention have sustained output without resolving underlying fragility, and why competing schools of thought argue past one another — each capturing a partial truth valid under different constraint conditions.

Keywords: demand constraint; supply constraint; macroeconomic methodology; secular stagnation; regime identification; monetary non-neutrality (search for similar items in EconPapers)
JEL-codes: B40 B41 E20 E25 P0 (search for similar items in EconPapers)
Date: 2026, Revised 0007
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