Reference

Christophe Chamley (Paris School of Economics), “Demand Creates its Own Supply”, Paul Woolley Research Initiative Seminar, IDEI, May 23, 2011, 12:30–14:00, room MF 323.

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.

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