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The labor demand curve and the Frisch labor supply curve cross with the 'normal' slopes (i.e. ∆( ˆ l) < 0).
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This paper examines the long-run incidence of factor income taxes and expenditure taxes in an infinitely lived representative agent growth model which allows both for production externalities and for endogenous labor supply. The novelty of this paper is its investigating of how the long-run incidence of taxes is affected by indeterminacy of equilib...
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Context 1
... is also worth noting that the sign of ∆( ˆ l) implies the relative slope of the labor demand and Frisch labor supply curves. 6 Since the slope of the labor demand curve is always negative by assumption β − 1 < 0, if the labor demand curve is steeper than the Frisch labor supply curve as illustrated in Fig. 1 (we may say that the labor demand curve and the Frisch labor supply curve cross with the 'normal' slopes), then ∆( ˆ l) < ...
Context 2
... N 0 ( ˆ l) > 0, the new BGE will be located at the northeast of the previous intersection, which features higher employment and a higher growth rate of the economy, as shown in Fig. 4. At the initial level of employment ˙ k/k > ˙ c/c, and the ratio c/k will decline. The sustained increase in k causes the labor demand curve to shift to the right, while the sustained increase in c causes the Frisch labor supply curve to shift to the left, see Figs.1 and 2. 9 Since the growth rate of k is greater than that of c, the rightward movement of the labor demand curve is bigger than the left- ward movement of the labor supply curve, as shown in Fig.1. ...
Context 3
... N 0 ( ˆ l) > 0, the new BGE will be located at the northeast of the previous intersection, which features higher employment and a higher growth rate of the economy, as shown in Fig. 4. At the initial level of employment ˙ k/k > ˙ c/c, and the ratio c/k will decline. The sustained increase in k causes the labor demand curve to shift to the right, while the sustained increase in c causes the Frisch labor supply curve to shift to the left, see Figs.1 and 2. 9 Since the growth rate of k is greater than that of c, the rightward movement of the labor demand curve is bigger than the left- ward movement of the labor supply curve, as shown in Fig.1. Consequently, employment will rise when the labor demand curve and the Frisch labor sup- ply curve cross with the 'normal slopes' (i.e., ∆( ˆ l) < 0). ...
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Citations
In the previous chapters, we restrict our attention to closed-economy models. This chapter examines equilibrium indeterminacy in open economies. The central concern of this chapter is to explore how international transactions affect the dynamic behaviors of macroeconomies. In particular, we focus on the difference in the indeterminacy conditions between open economies and their closed economy counterparts. We first discuss small open economies and then explore the world economy consisting of two large countries.
The stabilization effects of fiscal and monetary policy in the context of dynamic macroeconomic models with rational expectations differ from the effects in traditional Keynesian models. In the rational expectations setting, if a policy rule eliminates multiplicity of equilibrium, that policy stabilizes the economy in the sense that it excludes sunspot-driven business fluctuations. Conversely, if a policy rule gives rise to equilibrium indeterminacy, that policy destabilizes the economy. Roughly speaking, if a policy rule stabilizes a Keynesian model with backward-looking expectations, the same policy often generates indeterminacy in the equilibrium models with rational expectations.
In this short chapter, we refer to the recent development of macroeconomic models with equilibrium indeterminacy. The global financial crisis of 2007–2008 forced macroeconomists to rethink about their analytical frameworks. The mainstream dynamic stochastic general equilibrium (DSGE) approach was severely criticized by practitioners and policy makers because it failed to offer useful policy recommendations for the financial crisis as well as for the prolonged slumps in many countries after the crisis. In the search for new directions in macroeconomic analysis, there is renewed interest in macroeconomic models with equilibrium indeterminacy. In what follows, we pick out a notable sample of the recent studies in the field.
