Animal Spirits and Investment Complementarities in a Temporary Equilibrium model with Underemployment

Sezgin Polat

No 10-1, GIAM Working Papers from Galatasaray University Economic Research Center

Abstract: This paper proposes a sequential macroeconomic model to study investment complementarities in the presence of un(der)employment. It also incorporates some assumptions generally used in Keynesian economics like animal spirits, cash-in-advance constraints and irreversibility of investment decisions. The construction of the model puts special emphasis on the role of investment decisions in the formation of business cycles.Our results provide support to the view that wage flexibility does not promise neither to dampen expectation-driven economic fluctuations nor to shorten the adjustment period. In the fix-price equilibrium, there appears a trade-of between unemployment and output volatility. When the wage formation is less sensitive to changes in past level of unemployment, less pronounced, the output volatility and more pronounced the unemployment volatility

Keywords: Complementarites; Animal Spirits; Sequential Model; Fluctuations (search for similar items in EconPapers)
JEL-codes: B22 E22 E24 E32 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2010-11-14, Revised 2010
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Persistent link: https://EconPapers.repec.org/RePEc:ris:giamwp:2010_001

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