Involuntary unemployment in overlapping generations model due to instability of the economy and fiscal policy for full-employment

Yasuhito Tanaka

MPRA Paper from University Library of Munich, Germany

Abstract: The existence of involuntary unemployment advocated by J. M. Keynes is a very important problem of the modern economic theory. Using a three-generations overlapping generations model, we show that the existence of involuntary unemployment is due to the instability of the economy. Instability of the economy is the instability of the difference equation about the equilibrium price around the full-employment equilibrium, which means that a fall in the nominal wage rate caused by the presence of involuntary unemployment further reduces employment. This instability is due to the negative real balance effect that occurs when consumers’ net savings (the difference between savings and pensions) are smaller than their debt multiplied by the marginal propensity to consume from childhood consumption. Also we present a discussion about fiscal policy by seigniorage to realize full-employment.

Keywords: overlappling generations model; involuntary unemployment; instability of the economy; negative real balance effect; fiscal policy by seigniorage (search for similar items in EconPapers)
JEL-codes: E12 E24 (search for similar items in EconPapers)
Date: 2021-02-19
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pke
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https://mpra.ub.uni-muenchen.de/106588/1/MPRA_paper_106588.pdf revised version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:106214

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