Geographical Space and Effective Demand Under Stagnation

Abstract

This paper investigates the adjustment mechanism between geographical space and effective demand under stagnation by constructing a spatial model with stagnation included. The model takes the idea of stagnation in Ono (2001) and combines it with the spatial model of Perera-Tallo (2003). The spatial model features local monopolists that import intermediate goods from other monopolists at a cost that can be decreased through investment. Using the integrated model, we reach the following conclusion: the wider the geographical space, the lower the effective demand under stagnation. This mechanism is explained as follows. Under stagnation, where demand has reached an upper bound, a decrease in the marginal cost of reaching distant intermediate suppliers reduces employment. The reason is 'love of variety' in production: for given final output, more variety of available intermediate inputs crowds out per-variety demand of intermediates and thus employment. Decreases in employment then lead to a decrease in the rate of time preference through a rise in the deflation rate, and thereby decrease the desire for consumption, consequently cutting effective demand. Copyright 2006 The Authors Journal compilation 2006 Blackwell Publishing Ltd/University of Adelaide and Flinders University .

Zero Nominal Interest Rates, Unemployment, Excess Reserves and Deflation in a Liquidity Trap

“…19 Figure 5 is essentially the same as Ono (1994, figures 4.1;2001, figure 5). See Matsuzaki (2003), Hashimoto (2004), Johdo (2006Johdo ( , 2008aJohdo ( , 2008b, Ono (2006), Rodríguez-Arana (2007), Johdo and Hashimoto (2009) and Ono and Ishida (2009) for the same type of stagnation. Whereas they assume that the marginal utility of money remains positive, we do not assume it; however, persistent unemployment occurs.…”

Growth, Stagnation and Status Preference

“…17 17 This result is similar to Ono (1994, 2001), who shows that an aggregate demand shortage and unemployment persistently arise if utility of money is insatiable. See also Matsuzaki (2003), Hashimoto (2004), Johdo (2006, 2008a, 2008b), Ono (2006), Rodríguez‐arana (2007) and Johdo and Hashimoto (2009) for the same type of unemployment. In their models, however, people's status preference is not taken into account. …”

Macroeconomic Interdependence Between a Stagnant and a Fully Employed Country

“…Matsuzaki (2003) and Hashimoto (2004) introduce heterogeneous households to the model and examine the effect of redistribution policy on aggregate demand. Johdo (2006) considers the effect of R&D subsidies on aggregate demand and employment. Ono (2010) applies the model to analyse Japan's long-run stagnation and economic policies.…”