Abstract
In this chapter we will study the impact of our ‘compromise—transactions principle’in a few macro—economic adjustment models. We will confine ourselves to recursive systems applied to one or two markets.
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Notes to Chapter 7
Cf. Phillips (1958)
For ρ→ ∾ (and 0 < λ <1) cd → max [(α3 γp—1)> cb]
We abstracted from any impact of labour availability on investment demand by relating the preferred capital stock only to potential product demand yd. It would be interesting however to analyze in a disequilibrium framework with a more realistic production model the two ways in which labour scarcity may affect investment: a negative incentive because of the employment problems of new capital goods and a positive impulse standing for attempts to replace the existing capital stock by one utilizing less labour.
These constraints are perhaps better expressed in terms of the existing capital stock than in terms of replacement demand, but ultimately this difference does not matter in our model as replacement demand is a linear function of the capital stock.
We postulated a clay—clay production model in a preliminary study (Siebrand, 1976) in which we abstracted from economic obsolescence of machinery. The vintage structure does hardly effect the results, however, if we allow only for technical deterioration. As we did not want to complicate our model with the description of the history of the capital stock, we deleted the differentiation in vintages in this context therefore.
Alternatively, we could have followed the structure of Model 2.7 to determine effective labour demand, effective labour supply and employment. We concluded from preliminary investigations in which potential labour supply was partly endogenously determined that such amendments would not affect overall macro dynamics much.
The preoccupation with the tension in the labour market may be justified to some extent as scarcity—induced international substitution of commodities appears to be much easier than that of (skilled) labour. Such a substitution process may prevent the accumulation of extreme pressure of home demand for products in open economies. It would have been conceivable to decompose the tensions in both markets in their constituting elements such as (yd/ysk) and (ysk/ys) in the case of the product market and (ld/ln) and (ln/ls) in the case of the labour market, in order to differentiate the impacts of the tensions according to their components. An argument for such a decomposition can be that the agents react differently to different components because they consider some gaps less short—lived than others. This may hold for instance for the gap between capacity employment (ln) and potential labour supply (ls), compared with the gap between labour demand, based on product demand (ld) and capacity employment (ln). The first gap determines also a component of the tension in the product market (ysk/ys)> according to eq. (7.22), while the other component (yd/ysk), the ratio between potential demand for products and the material production capacity, is of a completely different character. Awareness of these differences in background might also lead to different reactions. We abstracted however from any differentiation in this respect for reasons of simplicity.
The same cycle occurs after a similar demand impluse of 0.20.
As illustrated in part A of the appendix to this chapter. α2 = 8.5 corresponds with α* 2 = 0.16 in il = [s + α* 2 (υyd—k)]–2, and α2 = 17 withal α* 2 = 0.33.
There is no upswing at all if cb is eliminated.
Unless consumption always carries the whole burden of supply shortages, investment has to fall short of investment demand at least for some periods in his system if production is sometimes determined by the full—employment ceiling; nevertheless capital is always abundant in his model.
Letters between parentheses refer to the different simulations.
The model could benefit from amendments that make labour demand relatively less sensitive to product demand in recessions for instance.
Cf. Bentzel and Hansen (1954). Wold, of course, is the most prominent author on recursive systems; cf. Wold and Juréen (1953), Wold (1954), Wold (1960) and Strotz and Wold (1960).
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Siebrand, J.C. (1979). Examples of dynamic models in which adjustment is conditioned by volume constraints. In: Towards Operational Disequilibrium Macro Economics. Springer, Dordrecht. https://doi.org/10.1007/978-94-017-3561-2_7
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DOI: https://doi.org/10.1007/978-94-017-3561-2_7
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