Business confidence and depression prevention. A micro-macroeconomic perspective

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Abstract

A change in business confidence such as might be triggered by a crash in the stockmarket may lead to a depression. Using a micro-macroeconomic analysis (for both the short- and long-run models), it is shown that an expected fall in real aggregate demand may be self-fulfilling. Moreover, under such conditions the maintenance of aggregate demand by monetary and fiscal policies is insufficient to prevent a depression. In addition, it may be necessary to reduce real wage-rates as unemployment increases and to prevent real wage-rates from increasing as prices fall. If the number of firms decreases, the (transitional) reduction in wage-rates has to be substantial enough to more than offset this exit effect.

Original languageEnglish
Pages (from-to)65-86
Number of pages22
JournalMathematical Social Sciences
Volume25
Issue number1
DOIs
Publication statusPublished - Dec 1992

Keywords

  • aggregate demand
  • business confidence
  • Business cycles
  • depression
  • imperfect competition

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