the Keynes and Pigou Effects
JEL Category E00
Macroeconomics and Monetary Economics: General
Alternate JEL Category E10
General Aggregative Models: General
A Proposal for Presentation at
The 70th International Atlantic Economic Conference
Charleston, South Carolina
October 10 – 13, 2010
Ben L. Kyer
Professor of Economics
Francis Marion University
Florence, SC 29501
And
Gary E. Maggs
Professor of Economics
St. John Fisher College
Rochester, NY 14618
I. OBJECTIVE
While there is an enduring and generally accepted argument with regard to the role that time plays in influencing the slope of the aggregate supply curve, there is an absence of such curiosity and research concerning the role of time plays in influencing the slope or the more methodologically oriented price-level elasticity of aggregate demand. The purpose of this paper, then, is to demonstrate how time may be considered as a determinant of aggregate demand elasticity.
II. DATA/METHODS
The model that is developed is fundamentally a standard price-flexible ISLM model within the context of a private closed economy. Aggregate real saving is assumed to depend upon real aggregate income and the real value of aggregate assets, with aggregate nominal financial assets constituting the sum of narrowly defined money and consol bonds. In addition, saving is assumed to depend upon time through the value of one or more of its underlying structural parameters. Aggregate real investment is specified as a depending primarily on the real rate of interest with the elapsing of time also introduced as a contributor to potential changes in the strength of the investment - interest rate relationship. The money market is comprised of aggregate real money demand, which is specified as determined by aggregate real income and the interest rate but, in addition, time is also included as a determinant of each of the underlying parameters in the aggregate money demand function. The aggregate supply of money is assumed determined by the central bank’s monetary policy choices, with time also factoring into the extent of money expansion vis-à-vis the change in aggregate bank reserves. Then, the money market equilibrium expression can be conveniently derived from these specifications of money demand and supply.
III. RESULTS/EXPECTED RESULTS
The structural equations for the product and money markets are solved simultaneously in order toderive an expression for aggregate demand. This expression is then used to solve for both the slope and elasticity of aggregate demand with respect to the price level. It is easily demonstrated at this point that the value of the price-level elasticity is affected by a number of underlying structural parameters from both the product and money markets. Then, given the value of aggregate supply, general equilibrium in aggregate output/income space can be determined. The contribution and importance of this expression is evident: the role of time is explicitly introduced for the first time. This permits a characterization of aggregate demand in terms of both its short-and long-term behavior.