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Inter-Regional Factor Allocation in the Neo-Keynesian Macroeconomic Model

Author

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  • Hannu Laurila

    (School of Management, University of Tampere)

Abstract

The standard neoclassical Two-Sector Model of inter-regional factor allocation says that apositive demand shock in one region starts immigration of both labour and capital, but that thea djustment of market prices eventually reproduces the inter-regional equilibrium. In the Neo-Keynesian macroeconomic framework of this paper, however, both the initial effects of the demand shock and the adjustment path to the new equilibrium are different. Under Perfect Foresight or under Rational Expectations the factors do not move at all, but under Adaptive Expectations the factors are induced to move in the short run. However, the factors move in opposite directions: a positive demand shock causes capital to immigrate and labour to emigrate. Inter-regional factor migration is an alternative to the intra-regional adaptation of people’s expectations, which is the original rationale of the Adaptive Expectations Hypothesis.

Suggested Citation

  • Hannu Laurila, 2007. "Inter-Regional Factor Allocation in the Neo-Keynesian Macroeconomic Model," Working Papers 0756, Tampere University, Faculty of Management and Business, Economics.
    • Handle: RePEc:tam:wpaper:0756
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    File URL: http://urn.fi/urn:isbn:978-951-44-70-41-7
    File Function: First version, 2007
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    More about this item

    Keywords

    adaptive expectations hypothesis (AEH); factor migration; spatial resource allocation;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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