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Imperfect competition,Aggregate demand and Business Fluctuations Piero Ferri Department of Economics “H.P. Minsky” University of Bergamo - Italy.

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Presentation on theme: "Imperfect competition,Aggregate demand and Business Fluctuations Piero Ferri Department of Economics “H.P. Minsky” University of Bergamo - Italy."— Presentation transcript:

1 Imperfect competition,Aggregate demand and Business Fluctuations Piero Ferri Department of Economics “H.P. Minsky” University of Bergamo - Italy

2 The relatioships between the topics Imperfect competition: the role of demand in micro and macro. The role of AD in macro in an uncertain environment Medium run and the Fluctuations

3 The Tenets of IKE Imperfect competition: its macro role has been limited by two assumptions: symmetry and rational expectations. The tenets of the IKE (imperfect knowledge): Uncertainty in a changing environment, Difficulty in making forecast

4 THE CONSEQUENCES Heterogeneity: differences with other approaches Bounded rationality Norm behavior Consequences on the aggregate macro supply.

5 THE ROLE OF AGGREGATE DEMAND The role of aggregate demand in macroeconomics according to Blanchard (2008). Microfoundations versus justification of real and monetary rigidity. The role of indebted consumer in the model Its relationship with labor share

6 The model There is interdependence between supply and demand aspects Interdependence between real and monetary aspects Nonneutralities a la Akerlof A medium-run perspective

7 Some methodological aspects In studying the dynamics, we refer to RS methodology. Regime 1 : bad state (high debt) and regime 2 virtuous state (low debt) Threshold: g (th) Changes: steady state of income distribution:  01 >  02 and parameter  in the price of raw material. Expectations: there is a learning process by means of Recursive Least square.

8 Aggregate demand and the worker borrower

9 The Supply side

10 Endogenous productivity In the present case, the pivotal equation is represented by the productivity equation:  tj =  1j +  2 g k t where j= 1,2 and g k represents the rate of growth of capital. The first component represents disembodied technical change, while the second represents the embodied component. The reason why it changes according to the regime, is to be attributed to diffusion processes of technical change that become more intense when aggregate demand is high. Initially, the same behavior in the 2 regimes

11 The Specification of Endogenous Productivity

12 The Remaining Equations of the Model

13 Steady States and Regimes Regimedπg

14 Recursive Least squares (RLS) Let us suppose that agents are bounded Rational. They try to learn the parameters In particular, let us assume that learn the values of the parameters By means of recursive least squares. This technique is useful when one has changing parameters.

15 Recursive Least square

16 The Dynamics of the Model u* = 0.08,  1 = 0.8  1 = 0.02,  11 = 0.008,  12 = 0.008,  2 = 0.03  1 = 0.20,  2 = 0.35,  3 = 0.60, c 1 = 0.40, c 2 = 0.405, c 3 = 0.1,  1 = 1.80,  2 = 0.5,  01 = 0.75,  02 = 0.78 R*= , theta1=0.95; theta2=1.30; phi=0.7

17 Imperfect competition and income distribution Initially Exogenous In the benchmark case, labor share 1< labor share 2. With the opposite hypothesis, the structural stability of the system is maintained. More flexibility is introduced if income distribution is endogenous: (see Rotemberg and Woodford, 1996)  t =  (t-1)*(1 -  (  m(t-1) -  m0j))) Fig.2 shows the relationship between growth and income distribution in the case that  01 >  02 and  =-0.1. All this implies that globalization and technical change can be made compatible with a variety of income distribution patterns.

18 The Role of Endogenous Income Distribution

19 Conclusion The medium-run, regime switching model, characterized by an interdependence between demand and supply factors, has shown how fluctuations can be generated The results depend on the existence of a relationship between consumption, income distribution and debt. From a technical point of view, RS is at the root of the dynamic behavior. Imperfect competition has a fundamental role in justifying the equations. It is shown that there cannot be strict microfoundations

20 Perspectives Different ways towards further developments: Abandon the reduced form for the endogenous income distribution. This implies considering also the labor market equations. Blanchard (2008)


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