In this paper, I explore the out-of-equilibrium macro-economic dynamic behaviour of Farmer’s (2010) ME-NA model. Specifically, preserving the assumption that microeconomic adjustments are instantaneous, I build a dynamic model in continuous time that describes the macro-economic adjustments of the value of output and the interest rate. Within this framework, I show that the model economy has a unique stationary solution whose dynamics is locally stable. Moreover, simulating the model economy under the baseline calibration, I show that the adjustments towards the steady-state equilibrium occur through endogenous convergent oscillations while the most promising way out from a finance-induced recession combines a fiscal expansion with interventions aimed at altering the trade-off between holding risky and safe assets.
How to Reduce Unemployment: Notes on Macro-Economic Stability and Dynamics
GUERRAZZI, MARCO
2010
Abstract
In this paper, I explore the out-of-equilibrium macro-economic dynamic behaviour of Farmer’s (2010) ME-NA model. Specifically, preserving the assumption that microeconomic adjustments are instantaneous, I build a dynamic model in continuous time that describes the macro-economic adjustments of the value of output and the interest rate. Within this framework, I show that the model economy has a unique stationary solution whose dynamics is locally stable. Moreover, simulating the model economy under the baseline calibration, I show that the adjustments towards the steady-state equilibrium occur through endogenous convergent oscillations while the most promising way out from a finance-induced recession combines a fiscal expansion with interventions aimed at altering the trade-off between holding risky and safe assets.
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