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When Demand Creates its Own Supply: Saving Traps

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  • Christophe Chamley

Abstract

The mechanism by which aggregate supply creates the income that generates its matching demand (called Say's Law), may not work in a general equilibrium with decentralized markets and savings in bonds or money. Full employment is an equilibrium, but convergence to that state is slow. A self-fulfilling precautionary motive to accumulate bonds (with a zero aggregate supply) can set the economy on an equilibrium path with a fast convergence towards a steady state with unemployment that may be an absorbing state from which no equilibrium path emerges to restore full employment.

Suggested Citation

  • Christophe Chamley, 2014. "When Demand Creates its Own Supply: Saving Traps," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(2), pages 651-680.
    • Handle: RePEc:oup:restud:v:81:y:2014:i:2:p:651-680
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    File URL: http://hdl.handle.net/10.1093/restud/rdt041
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    Cited by:

    1. Jonathan Heathcote & Fabrizio Perri, 2018. "Wealth and Volatility," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(4), pages 2173-2213.
    2. Xavier Ragot & Florin O. Bilbiie, 2016. "Monetary Policy, Inflation, and Inequality: The Case for Helicopters," 2016 Meeting Papers 1663, Society for Economic Dynamics.
    3. Paul Beaudry & Dana Galizia & Franck Portier, 2018. "Reconciling Hayek’s and Keynes’ Views of Recessions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(1), pages 119-156.
    4. repec:hal:spmain:info:hdl:2441/5t91n0a7l99k94kkmrh3362v8 is not listed on IDEAS
    5. repec:spo:wpmain:info:hdl:2441/5t91n0a7l99k94kkmrh3362v8 is not listed on IDEAS
    6. Caio Machado, 2024. "Coordinating in Financial Crises," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 54, October.
    7. Kuhle, Wolfgang, 2021. "Equilibrium with computationally constrained agents," Mathematical Social Sciences, Elsevier, vol. 109(C), pages 77-92.
    8. Monnet, Eric & Degorce, Victor, 2020. "The Great Depression as a Saving Glut," CEPR Discussion Papers 15287, C.E.P.R. Discussion Papers.
    9. Herakles Polemarchakis, 2015. "Markets and Efficiency," The Japanese Economic Review, Japanese Economic Association, vol. 66(2), pages 150-166, June.
    10. Edouard Challe, 2020. "Uninsured Unemployment Risk and Optimal Monetary Policy in a Zero-Liquidity Economy," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(2), pages 241-283, April.
    11. Edouard Challe, 2017. "Uninsured Unemployment Risk and Optimal Monetary Policy," Working Papers 2017-54, Center for Research in Economics and Statistics.
    12. Robertas Zubrickas, 2020. "Contingent wage subsidy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(4), pages 1105-1119, August.
    13. Wolfgang Kuhle, 2016. "An Equilibrium Model with Computationally Constrained Agents," Papers 1611.01771, arXiv.org.
    14. Édouard Challe, 2018. "Is the Study of Business-Cycle Fluctuations “Scientific?”," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(3), pages 151-165.
    15. Habanabakize Thomas & Muzindutsi Paul-Francois, 2018. "Analysis of the Keynesian Theory of Employment and Sectoral Job Creation: The Case of the South African Manufacturing Sector," Folia Oeconomica Stetinensia, Sciendo, vol. 18(1), pages 123-143, June.
    16. Corsetti, Giancarlo & Brendon, Charles, 2016. "COEURE Survey: Fiscal and Monetary Policies after the Crises," CEPR Discussion Papers 11088, C.E.P.R. Discussion Papers.

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