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The Diamond of Macroeconomic Equilibria and Non-Inflationary Expansion

journal contribution
posted on 2023-05-16, 16:51 authored by McDonald, IM, Sibly, HA
This paper combines the microeconomic foundations of earlier models of a range of equilibrium rates of employment to generate a model with a diamond of equilibria. Analysis of the diamond model shows that for a depressed economy an expansionary aggregate demand policy can, without violating rational expectations of inflation, generate a central proposition of Keynesian economics—a non-inflationary expansion (NIE), that is a permanent increase in employment without increasing inflation. The microeconomic foundations of the model draw on ideas of customer markets, reference dependence and loss aversion. It is also shown that the possibility of achieving an NIE is enhanced if a macro price policy, such as incomes policy or inflation targeting, accompanies the expansion in aggregate demand. © 2017 Wiley. All rights reserved.

History

Publication title

Metroeconomica

Volume

56

Pagination

393-409

ISSN

0026-1386

Department/School

TSBE

Publisher

Blackwell Publishing Ltd.

Place of publication

Oxford

Repository Status

  • Restricted

Socio-economic Objectives

Macroeconomics not elsewhere classified

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