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- W3036692977 abstract "The present study aims to perceive an unacceptable unreality of a macro price mechanism: that is, unreality that under any severe recession, deterioration of deflation or a consistent decrease in rate of inflation will lead an economy to full employment equilibrium. This unreality results from an arbitrary assumption that micro price mechanism operates even in a macro economy. This study challenges existing modern macroeconomics theories on price mechanism and unemployment based on skepticism toward existing theories based on observations of a real economy. The study reveals two main results. First, market failure in a macro economy, that is, price mechanism is significantly incomplete and does not function, in particular, under deflation. This differs significantly from the market failure due to inflexibility of wages and prices, asymmetry of information, and so on, as stated by new Keynesianism. The key reason for market failure in a short-run macro economy is unavoidable spillover effects, or derived demand effects between goods and labor markets under disequilibrium due to inflexible wages and prices. Macro price mechanism completely overlooks these effects because of arbitrary assumption, thus leading to unrealistic price mechanism stated earlier. Considering spillover effects, or derived demand effects under disequilibrium, assumption of full employment equilibrium, along with assumption of flexible wages and prices, does not hold. Although these effects are results of short-run analysis, there would be market failure in a macro economy even in long run as an inevitable conjecture. To rebuild dynamic stochastic general equilibrium (DSGE) models, it is important to study aforementioned fundamental and theoretical problem that macro price mechanism does not function. A static model is enough to explain mechanism and dynamic models appear unnecessary and unfeasible. Second, Keynes's unemployment equilibrium is realized owing to market failure in a macro economy. Market failure in a macro economy shows that involuntary unemployment results from quantitative and not price aspects. In other words, involuntary unemployment is not a result of rigidity of real wages but of a shortage in labor demand under rigid real wages. This is possible by reinterpreting Shapiro-Stiglitz efficiency wage model. Finally, demand is a critical factor in both short run and long run." @default.
- W3036692977 created "2020-06-25" @default.
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- W3036692977 date "2019-10-01" @default.
- W3036692977 modified "2023-09-27" @default.
- W3036692977 title "Toward Rebuilding of Modern Macroeconomic Theory: Market Failure in a Macro Economy and Keynes's Unemployment Equilibrium" @default.
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