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Expected Aggregate Demand, the Production Period and the Keynesian Theory of Aggregate Supply
Author(s) -
Palley Thomas I.
Publication year - 1997
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/1467-9957.00058
Subject(s) - economics , aggregate supply , aggregate demand , deflation , aggregate expenditure , aggregate behavior , monetary economics , microeconomics , supply and demand , wage , macroeconomics , labour economics , monetary policy
This paper presents a model of Keynesian aggregate supply behaviour. In the model production takes time, which introduces a lag between the incurrence of costs and the receipt of revenues. Aggregate supply is determined by expectations of aggregate demand, and actual aggregate demand depends on actual aggregate supply. Expectations of lower future nominal wages can reduce employment because of the “cash flow” effect, whereby lower future nominal wages cause lower future prices, thus rendering firms unable to recover costs fully. This effect represents a supply‐side obstacle to using nominal wage deflation to restore full employment, and it complements traditional demand‐side debt‐deflation effects.