Monopolistic Competition, Efficiency Wages and Perverse Effects of Demand Shock

Jim Malley and Hassan Molana

Working Papers from Business School - Economics, University of Glasgow

Abstract: In this paper we construct a stylised general equilibrium macromodel to show that demand led expansions may have unexpected effects when market imperfections lead to changes in labour productivity. We find some empirical support, from a number of European countries, for the main predictions of this model that unemployment and output are positively related when unemployment is low and inversely related when unemployment is high. An important policy insight that emerges from this study is that an exogenous stimulation of aggregate demand can only raise output and reduce unemployment provided the economy is operating relatively efficiently. However, when an economy is trapped in an inefficient equilibrium, positive demand shocks can lead, perversely, to an increase in unemployment.

JEL-codes: E62 H3 J41 (search for similar items in EconPapers)
Date: 2000-12, Revised 2001-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Monopolistic Competition, Efficiency Wages and Perverse Effects of Demand Shock (2001)
Working Paper: Monopolistic Competition, Efficiency Wages and Perverse Effects of Demand Shock (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2000_20

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