Production Subsidy as a Macroeconomic Policy in a Stagnation Economy

Abstract

This paper analyzes the effects of a changing production subsidy in a model with money-in-the-utility function for households, monopolistic competition amongst an endogenously-determined number of firms, and nominal wage sluggishness that can prevent the equilibrium from attaining full employment. Its conclusion is that in a steady state with less than full employment (that is, under stagnation), a larger production subsidy will promote entry and stimulate effective demand provided that the elasticity of substitution among the differentiated products is sufficiently high. This paper is motivated by recent Japanese experiences.

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. …”