scholarly journals Fiscal Policy as a Solution to Involuntary Unemployment

Ekonomika ◽  
2021 ◽  
Vol 100 (2) ◽  
pp. 63-83
Author(s):  
Yasuhito Tanaka

We show the existence of involuntary unemployment based on consumers’ utility maximization and firms’ profit maximization behavior under monopolistic competition with increasing, decreasing or constant returns to scale technology using a three-periods overlapping generations (OLG) model with a childhood period as well as younger and older periods, and pay-as-you-go pension for the older generation, and we analyze the effects of fiscal policy financed by tax and budget deficit (or seigniorage) to achieve full-employment under a situation with involuntary unemployment. Under constant prices we show the following results. 1) If the realization of full employment will increase consumers’ disposable income, in order to achieve full-employment from a state with involuntary unemployment, we need budget deficit (Proposition 1). 2) If the full-employment state has been achieved, we need balanced budget to maintain full-employment (Proposition 2). We also consider fiscal policy under inflation or deflation. Additionally, we present a game-theoretic interpretation of involuntary unemployment and full-employment. We also argue that if full employment should be achieved in equilibrium, the instability of equilibrium can be considered to be the cause of involuntary unemployment.

2021 ◽  
pp. 2150018
Author(s):  
Yasuhito Tanaka

This study aimed to provide a game-theoretic interpretation of the analyses of involuntary unemployment by deficiency of aggregate demand and fiscal policy to achieve full employment using an overlapping generations model. We showed that involuntary unemployment is in a Nash equilibrium of a game with a firm and consumers. Moreover, we showed that full employment can be achieved through fiscal policies that create budget deficits in recessionary conditions with involuntary unemployment. Once full employment is achieved, it can be sustained without a budget deficit.


2020 ◽  
pp. 1-14
Author(s):  
YASUHITO TANAKA

This paper is an attempt to provide a micro-theoretical basis for Keynesian economics while maintaining as much of the neoclassical framework as possible, such as utility maximization for consumers and profit maximization for firms. We show the existence of involuntary unemployment without assuming wage rigidity when labor supplies of individuals are indivisible. We derive involuntary unemployment using an overlapping generations model under monopolistic competition with constant returns to scale technology and indivisible labor supply.


2021 ◽  
Vol 8 (2) ◽  
pp. 65
Author(s):  
Yasuhito Tanaka

Even under constant returns to scale technology there is a positive profit return if the goods are produced in monopolistic competition. By a two-periods overlapping generations (OLG) model with production in monopolistic competition under constant returns to scale in which the economy grows by technological progress and the older generation consumers receive the profits, we consider the problem of budget deficit. We show that the budget deficit equals the difference between the net savings of the younger generation consumers excluding the profits received in the future and that of the older generation consumers in each of the following cases. Also, the following results will be proved. 1) A budget deficit is necessary to realize full employment with constant price when the economy grows. 2) If the budget deficit exceeds the level necessary and sufficient to maintain full employment in a growing economy with constant price, inflation will occur. A stable budget deficit is necessary to prevent further inflation. 3) If the budget deficit is insufficient to maintain full employment, a recession with involuntary unemployment occurs. We can overcome a recession and restore full employment making a budget deficit larger than the one necessary and sufficient to maintain full employment without a recession. Since we can maintain full employment by constant budget deficits, we should not offset the deficit created for overcoming the recession by budget surpluses.


2020 ◽  
Vol 65 (2) ◽  
pp. 12-28
Author(s):  
Yasuhito Tanaka

AbstractWe show the existence of involuntary unemployment without assuming wage rigidity using a neoclassical model of consumption and production. We consider a case of indivisible labor supply and increasing returns to scale under monopolistic competition. We derive involuntary unemployment by considering utility maximization of consumers and profit maximization of firms in an overlapping generations (OLG) model with two or three generations. In a two-periods OLG model it is possible that a reduction of the nominal wage rate reduces unemployment. However, if we consider a three-periods OLG model including a childhood period, a reduction of the nominal wage rate does not necessarily reduce unemployment.


2021 ◽  
Vol 13 (3) ◽  
pp. 1
Author(s):  
Yasuhito Tanaka

In recent years, a school of economics called MMT (Modern Monetary Theory) has been attracting attention, but it has not been analyzed theoretically or mathematically. This study aims to provide a theoretical basis for the skeleton of the MMT argument, while maintaining the basics of the neoclassical microeconomic framework, such as utility maximization of consumers by means of utility functions and budget constraint, profit maximization of firms in monopolistic competition, and equilibrium of supply and demand of goods. Using a simple static model that includes economic growth due to technological progress, we will argue that: 1) a continuous budget deficit is necessary to maintain full employment when the economy is growing, and that this deficit does not have to be covered by future surpluses; 2) Inflation is caused when the actual budget deficit exceeds the level necessary and sufficient to maintain full employment. In order to avoid further inflation, it is necessary to maintain a certain level of budget deficit; 3) A shortfall in the budget deficit leads to recession and involuntary unemployment. To recover from this, a budget deficit that exceeds the level necessary to maintain full employment is required. However, since a continuous budget deficit is necessary after full employment is restored, the deficit created to overcome the recession does not need to be covered by future budget surpluses, nor should it be.


2021 ◽  
Vol 11 (3) ◽  
pp. 78
Author(s):  
Yasuhito Tanaka

The purpose of this paper is to provide a concise theoretical and mathematical foundation for the major parts of the debate in the recently discussed school of economics called Modern Monetary Theory (MMT), while maintaining the basics of the neoclassical microeconomic framework, such as utility maximization of consumers using budget constraints and utility functions, and equilibrium of demand and supply of goods under perfect competition with constant returns to scale technology. By a two-periods overlapping generations (OLG) model in which the economy grows by technological progress, we will show that: 1) We need a budget deficit to achieve full employment with constant price when the economy grows by technological progress. This budget deficit should not be offset by future surplus; 2) A budget deficit that exceeds the level necessary to maintain full employment in a growing economy with constant price will cause inflation. A stable budget deficit is required to prevent further inflation; 3) A budget deficit that is insufficient to maintain full employment will cause a recession with involuntary unemployment. A budget deficit larger than the one necessary and sufficient to maintain full employment without a recession can overcome a recession caused by insufficient budget deficit and restore full employment. The deficit created to overcome the recession should not be offset by subsequent surpluses, since full employment can then be maintained through constant budget deficits.


2021 ◽  
Vol 11 (4) ◽  
pp. 39
Author(s):  
Yasuhito Tanaka

Even in perfect competition there is a positive profit return if the good is produced with decreasing returns to scale technology. Using a two-periods overlapping generations (OLG) model with production under perfect competition with decreasing returns to scale technology in which the economy grows by technological progress and the older generation consumers receive the profit returns, we consider the problem of budget deficit under economic growth. We will show the following results. 1) We need a budget deficit to achieve full employment under constant price when the economy grows by technological progress. 2) If the budget deficit exceeds the level necessary to maintain full employment in a growing economy under constant price, inflation will be triggered. We need a stable budget deficit to prevent further inflation. 3) If the budget deficit is insufficient to maintain full employment, it will cause a recession with involuntary unemployment. We can overcome a recession and restore full employment caused by insufficient budget deficit by a budget deficit larger than the one necessary and sufficient to maintain full employment without a recession. We should not offset the deficit created to overcome the recession by subsequent surpluses because we can maintain full employment through constant budget deficits. Also, we show that in each case the budget deficit equals the difference between the net savings of the younger generation consumers and that of the older generation consumers.


Author(s):  
Yves Balasko

This chapter examines the net supply correspondence of a constant returns to scale firms under suitable convexity and smoothness assumptions. These assumptions are comparable to those used in the previous chapters for consumers and production with decreasing returns to scale. The chapter starts by formulating constant returns to scale production by way of production sets with arbitrary numbers of inputs and outputs. It then addresses the profit maximization problem of a constant returns to scale firm. That problem does not always have a solution. More accurately, if some feasible activity yields a strictly positive profit at some given prices, then it suffices to consider an arbitrarily large multiple of that activity vector to get a feasible activity that yields an arbitrarily large profit at the same prices. The firm can then make an arbitrarily large profit.


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