Seminar

Demand Creates its Own Supply

Christophe Chamley (Paris School of Economics)

May 23, 2011, 12:30–14:00

Room MF 323

Paul Woolley Research Initiative Seminar

Abstract

As recent events attest, modern economies may have trouble enforcing Say's Law. An economy with decentralized markets and trades between goods and a liquid asset, money, has two equilibria. In full-employment, output is determined by supply. But a higher demand for liquidity is self-fulfilling and precipitates the economy to an equilibrium where output is determined by demand: the increase of the private uncertainty about the ability to sell goods generates the higher demand for liquidity. That state may be a trap: a reverse shift from pessimism to optimism may not be sufficient, without policy intervention, to restore full-employment.

JEL codes

  • E00: General
  • E10: General
  • E21: Consumption • Saving • Wealth
  • E41: Demand for Money