Short-run Rigidities and Long-run Equilibrium in Large-scale Macroeconometric Models

Keith B. Church, Peter R. Mitchell and Kenneth F. Wallis

Chapter 9 in Market Behaviour and Macroeconomic Modelling, 1998, pp 221-241 from Palgrave Macmillan

Abstract: Abstract A widespread response to the persistence of high unemployment in many OECD countries has been an increased emphasis on structural features of the economy, especially in respect of the functioning—or malfunctioning— of labour markets, and a corresponding reduction of emphasis on demand management policies. Indeed, to stimulate demand would be seen as an inappropriate response to ‘structural’ unemployment, causing inflation to rise instead. This is consistent with a neo-classical view of the world, at least in respect of its long-run equilibrium properties, in which the level of real activity is independent of the steady-state inflation rate. In the short run, however, a more Keynesian view might be appropriate, due to real and nominal rigidities in the determination of wages and prices which result in a relatively slow process of dynamic adjustment to equilibrium.

Keywords: Inflation Rate; Real Exchange Rate; Real Wage; Demand Shock; Wage Equation (search for similar items in EconPapers)
Date: 1998
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DOI: 10.1007/978-1-349-26732-3_9

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