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When Demand Creates its Own Supply: Saving Traps

Abstract : The mechanism by which aggregate supply creates the income that generates its matching demand (called Say’s Law), may not work in a general equilibrium with decentralized markets and savings in bonds or money. Full employment is an equilibrium, but convergence to that state is slow. A self-fulfilling precautionary motive to accumulate bonds (with a zero aggregate supply) can set the economy on an equilibrium path with a fast convergence towards a steady state with unemployment that may be an absorbing state from which no equilibrium path emerges to restore full employment.
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Submitted on : Saturday, January 24, 2015 - 12:38:46 PM
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Christophe Chamley. When Demand Creates its Own Supply: Saving Traps. Review of Economic Studies, Oxford University Press (OUP), 2014, 81 (2), pp.651-680. ⟨10.1093/restud/rdt041⟩. ⟨halshs-01109084⟩



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