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Involuntary unemployment in overlapping generations model due to instability of the economy and fiscal policy for full-employment

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  • Tanaka, Yasuhito

Abstract

The existence of involuntary unemployment advocated by J. M. Keynes is a very important problem of the modern economic theory. Using a three-generations overlapping generations model, we show that the existence of involuntary unemployment is due to the instability of the economy. Instability of the economy is the instability of the difference equation about the equilibrium price around the full-employment equilibrium, which means that a fall in the nominal wage rate caused by the presence of involuntary unemployment further reduces employment. This instability is due to the negative real balance effect that occurs when consumers’ net savings (the difference between savings and pensions) are smaller than their debt multiplied by the marginal propensity to consume from childhood consumption. Also we present a discussion about fiscal policy by seigniorage to realize full-employment.

Suggested Citation

  • Tanaka, Yasuhito, 2021. "Involuntary unemployment in overlapping generations model due to instability of the economy and fiscal policy for full-employment," MPRA Paper 106214, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:106214
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    File URL: https://mpra.ub.uni-muenchen.de/106588/1/MPRA_paper_106588.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    overlappling generations model; involuntary unemployment; instability of the economy; negative real balance effect; fiscal policy by seigniorage;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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