Premium
Expectations and policies in deflationary recessions
Author(s) -
Colombo Luca,
Weinrich Gerd
Publication year - 2018
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/meca.12177
Subject(s) - economics , deflation , keynesian economics , business cycle , spillover effect , recession , underemployment , shock (circulatory) , monetary economics , monetary policy , new keynesian economics , macroeconomics , inflation (cosmology) , great recession , unemployment , medicine , physics , theoretical physics
In this paper, we use a non‐tâtonnement dynamic macroeconomic model to study the role of inventories, expectations and wages in the business cycle. Following a restrictive monetary shock, by amplifying spillover effects inventories may imply that the economy converges to a deflationary locally stable Keynesian underemployment state. The model is applied to evaluate economic policies like quantitative easing as well as the effectiveness of holding inflationary expectations to recover to full employment. If inflationary expectations are not sufficient, imposing downward rigidity of nominal wages helps to exit from the recession.