New Micro-foundations for Macroeconomics
"Liquidity Constraints and Non-market Clearing: A Recipe for Recession?"
John Driffill (WEF & Birkbeck) & Marcus Miller (Warwick)
Friday 10 July, 16.30 - 17.15
Abstract
In their ‘workhorse model of money and liquidity’, Kiyotaki and Moore (2008) show how credit shocks can affect current investment and future aggregate supply. Despite these fluctuations in investment, aggregate demand matches current supply via a flex-price ‘Pigou effect’ that changes the value of real balances and so consumption.
By switching from a flex-price to a fix-price characterisation of goods and labour markets, we find that demand failures can emerge after a liquidity shock. In short, a framework that combines elements of RBC optimisation with Keynesian fix-price economics implies that financial factors can affect current output as well as future supply.