interaction between demand for labor and consumption over the business cycle

Wouter Den Haan
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Wouter Den Haan: London School of Economics

No 272, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: This paper develops a framework with a standard labor market matching friction and a friction in commodities markets which leads to firms not always selling everything being produced and thus to inventory accumulation. A savings glut can lead to a downward spiral in which reductions in consumer demand and demand for workers reinforce each other. Key is that the need for firms to finance inventories provides an outlet for the additional savings, so that there is no or not enough downward pressure on interest rates to kill the savings glut. These results do not require sticky prices and/or sticky wages.

Date: 2012
New Economics Papers: this item is included in nep-dge
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