Stochastic Macro-equilibrium and Microfoundations for Keynesian Economics

Author Name YOSHIKAWA Hiroshi  (Faculty Fellow, RIETI)
Creation Date/NO. May 2013 13-E-039
Research Project Issues Faced by Japan's Economy and Economic Policy Part II: Population decrease, sustained growth, economic welfare
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In place of the standard search equilibrium, this paper presents an alternative concept of stochastic macro-equilibrium based on the principle of statistical physics. This concept of equilibrium is motivated by unspecifiable differences in economic agents and the presence of all kinds of micro shocks in the macroeconomy. Our model mimics the empirically observed distribution of labor productivity. The distribution of productivity resulting from the matching of workers and firms depends crucially on aggregate demand. When aggregate demand rises, more workers are employed by firms with higher productivity while, at the same time, the unemployment rate declines. The model provides a micro-foundation for Keynes' principle of effective demand.