The Diamond of Macroeconomic Equilibria and Non-inflationary Expansion
Year: 2005
Type: article
Abstract: This paper combines the microeconomic foundations of earlier models of a range of equilibrium rates of employment to generate a model with a diamond of equilibria. Analysis of the diamond model shows that for a depressed economy an expansionary aggregate demand policy can, without violating rational expectations of inflation, generate a central proposition of Keynesian economics—a non-inflationary expansion (NIE), that is a permanent increase in employment without increasing inflation. The microeconomic foundations of the model draw on ideas of customer markets, reference dependence and loss aversion. It is also shown that the possibility of achieving an NIE is enhanced if a macro price policy, such as incomes policy or inflation targeting, accompanies the expansion in aggregate demand.
Source: Metroeconomica
Authors: Ian M. McDonald, Hugh Sibly
Institutions: The University of Melbourne, University of Tasmania
Language: English
Topic: Economic Theory and Policy
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2125963400