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Technical progress and involuntary unemployment under deflation with real balance effect and fiscal policy for full-employment

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  • Tanaka, Yasuhito

Abstract

We study the steady state with involuntary unemployment and fiscal policy to realize full-employment in a situation with technical progress. Under involuntary unemployment the nominal wage rate may decline. Then, the prices of the goods also decline, and the real balance effects work. In a three-generations OLG model of this paper consumptions in the childhood period are financed by borrowing money from the previous generation consumers, and these debts must be repaid in the next period. In such a model there may exist positive or negative real balance effect of decline of the nominal wage rate and the prices. Among others we show the following results. If the deflation (nominal wage rate decline) rate is equal to the technical progress rate, in order to maintain a steady state with constant employment a balanced budget is required. If the deflation rate is smaller than the technical progress rate and there exists a positive (or negative) real balance effect, in order to maintain a steady state with constant employment a budget deficit (surplus) is required. Also we show that fiscal policy to realize full-employment usually requires larger budget deficit. These budget deficits, including those for maintaining full-employment, should be financed by seigniorage not by public debt. If they are financed by public debts, they do not have to be repaid. Conversely, the budget surplus in some cases should not be returned to consumers as tax reduction.

Suggested Citation

  • Tanaka, Yasuhito, 2021. "Technical progress and involuntary unemployment under deflation with real balance effect and fiscal policy for full-employment," MPRA Paper 106714, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:106714
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    References listed on IDEAS

    as
    1. Masayuki Otaki, 2015. "Price Theory in a Monetary Economy," Advances in Japanese Business and Economics, in: Keynesian Economics and Price Theory, edition 127, chapter 2, pages 15-41, Springer.
    2. Tanaka, Yasuhito, 2020. "Involuntary unemployment as a Nash equilibrium and fiscal policy," MPRA Paper 102049, University Library of Munich, Germany.
    3. Otaki, Masayuki, 2007. "The dynamically extended Keynesian cross and the welfare-improving fiscal policy," Economics Letters, Elsevier, vol. 96(1), pages 23-29, July.
    4. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
    5. Tanaka, Yasuhito, 2020. "Fiscal policy under involuntary unemployment," MPRA Paper 102507, University Library of Munich, Germany.
    6. Otaki, Masayuki, 2009. "A welfare economics foundation for the full-employment policy," Economics Letters, Elsevier, vol. 102(1), pages 1-3, January.
    7. Tanaka, Yasuhito, 2020. "Involuntary unemployment under monopolistic competition and fiscal policy for full-employment," MPRA Paper 101479, University Library of Munich, Germany.
    8. McDonald, Ian M & Solow, Robert M, 1981. "Wage Bargaining and Employment," American Economic Review, American Economic Association, vol. 71(5), pages 896-908, December.
    9. Yasuhito Tanaka, 2020. "Involuntary unemployment with indivisible labor supply under perfect competition," Economics Bulletin, AccessEcon, vol. 40(3), pages 1914-1923.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Involuntary unemployment; Three-periods overlapping generations model; Technical progress; Deflation; Real balance effect.;
    All these keywords.

    JEL classification:

    • E14 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Austrian; Evolutionary; Institutional
    • 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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