A Model of Aggregate Demand and Unemployment

Pascal Michaillat and Emmanuel Saez

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: We present a static model of aggregate demand and unemployment. The economy has a nonproduced good, a produced good, and labor. Product and labor markets have matching frictions. A general equilibrium is a set of prices, market tightnesses, and quantities such that buyers and sellers optimize given prices and tightnesses, and actual tightnesses equal posted tightnesses. In each frictional market,there is one more variable than equilibrium condition. To close the model, we take all prices as parameters. We obtain the following results: (1) unemployment and unsold production prevail in equilibrium; (2) each market can be slack, efficient, or tight if the price is too high, efficient, or too low; (3) product market tightness and sales are positively correlated under aggregate demand shocks but negatively correlated under aggregate supply shocks; (4) transfers from savers to spenders stimulate aggregate demand, product market tightness, and employment; (5) the government-purchase multiplier is positive when the economy is slack, zero when the economy is efficient,and negative when the economy is tight; (6) with unequal distribution of profits and labor income, a wage increase may stimulate aggregate demand and reduce unemployment.

Keywords: Unemployment; aggregate demand; matching frictions (search for similar items in EconPapers)
JEL-codes: E10 E21 E24 E30 (search for similar items in EconPapers)
Date: 2013-08
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (10)

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Related works:
Working Paper: A Model of Aggregate Demand and Unemployment (2013)
Working Paper: A model of aggregate demand and unemployment (2013)
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