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GEOGRAPHICAL SPACE AND EFFECTIVE DEMAND UNDER STAGNATION

GEOGRAPHICAL SPACE AND EFFECTIVE DEMAND UNDER STAGNATION 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Australian Economic Papers Wiley

GEOGRAPHICAL SPACE AND EFFECTIVE DEMAND UNDER STAGNATION

Australian Economic Papers , Volume 45 (4) – Dec 1, 2006

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References (22)

Publisher
Wiley
Copyright
Copyright © 2006 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0004-900X
eISSN
1467-8454
DOI
10.1111/j.1467-8454.2006.00294.x
Publisher site
See Article on Publisher Site

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.

Journal

Australian Economic PapersWiley

Published: Dec 1, 2006

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