Aggregate demand, sunk costs and discontinuous adjustments in an amended new consensus model

Federico Bassi

Review of Political Economy, 2016, vol. 28, issue 3, 313-335

Abstract: In standard new consensus macroeconomics models, the impact of shocks disappears until the economy reaches a time-independent steady-state equilibrium. Introducing sunk costs and capital indivisibilities in capacity adjustment decisions implies the rejection of asymptotic stability and a reconsideration of the relevance and usefulness of traditional steady-state analysis based on a fixed and exogenous ‘center of gravity’. Moreover, effective demand and Keynesian discretionary policies regain a central role in economic policy by determining the transient equilibriums that emerge endogenously.

Date: 2016
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DOI: 10.1080/09538259.2016.1199397

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