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Über dieses Buch

A macroeconomic disequilibrium model is developed for the Federal Republic of Germany. Starting with a microeconomic model of firm's behaviour, the optimal dynamic adjustment of employment and investment is derived. The model of the firm is complemented by an explicite aggregation procedure which allows to derive macroeconomic relations. The model is estimated with macroeconomic data for the Federal Republic of Germany. An important feature is the consistent introduction of dynamic adjustment into a model of the firm. A new method is the particular approach of a delayed adjustment of employment and investment. The estimation results show significant underutilizations of labour and capital and indicate the importance of supply constraints for imports and exports. As the most prominent result, they reveal the importance of the slow adjustment of employment and investment for the macroeconomic situation in Germany and especially for the persistence of high unemployment in the eighties.

Inhaltsverzeichnis

Frontmatter

Introduction

Introduction

Abstract
Despite some very interesting developments in the field of economic theory and econometrics there is still a gap between theoretical models of economic behaviour and their empirical applications. Most theoretical work is devoted to the analysis of equilibrium situations without saying very much about how this equilibrium is achieved. Econometric practise, however, finds strong support for long lags in economic behaviour and pays special attention to the modelling of dynamic adjustment paths. A good example for the method still used in empirical applications of economic theory is the work of Jorgenson on distributed lags in investment behaviour.1 In Jorgenson’s work, the optimal capital stock is derived from optimal demand for capital services equivalent to those of the pure static case, while actual investment expenditures are estimated in the form of lagged responses to changes in the demand for capital. However, as Nerlove notes,2
“... the concept of long run equilibrium towards which adjustment occurs may not be an empirically useful concent in a dynamic context.”
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Theory

Frontmatter

Chapter 1. Disequilibrium models

Abstract
Two lines of research in macroeconomics and business cycle theory can be distinguished.1 Until 1970, macroeconomic theory was dominated by Keynesian models. In Keynesian models, cyclical changes in output and employment are attributed to demand changes. These demand fluctuations are transmitted by the multiplier-accelerator mechanism, and the adjustment of prices is explained by Phillips-curve models. This consensus was expressed by the usage of the IS-LM model as the standard textbook model and was also evident at the applied level in the large scale macroeconometric models.2 According to this view, the economy is inherently unstable, showing up in persistent unemployment and excessive fluctuations in real activity in the short run, while the price mechanism embodied in the Phillips-curve assures some stability in the long run. This consensus view was challenged at the begin of the seventies both for theoretical and empirical reasons. First, the Keynesian model is basically a fix-price model and this conflicts sharply with microeconomic optimization behaviour. Of course, this theoretical deficiency had been observed long before and was not sufficient to attack Keynesian macroeconomics seriously, but at the beginning of the seventies it was accompanied by an empirical failure: the hypothesis of a stable Phillips-curve could not explain the rising rates of inflation and unemployment in the seventies.
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Chapter 2. The basic model

Abstract
In this chapter, a disequilibrium model of the behaviour of the firm is developed. As in the models of the New Keynesian Macroeconomics, the fix-price method is applied, because quantity constraints are considered as more important for the business cycle than endogenous wage and price setting. In contrast to these models of general (dis)-equilibrium, however, the analysis is limited to the firm’s decisions in disequilibrium situations. Household behaviour is left outside of the analysis, and only the partial (i.e. firm’s) equilibrium is derived within the model. The main features of the model are dynamic factor input adjustments and an explicit aggregation over firms in different goods and labour market situations. Within this framework, the optimal decisions of the firm with respect to output, employment, investment, and capital-labour substitution are derived from microeconomic optimization behaviour.
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Chapter 3. Extensions of the basic model

Abstract
This chapter is devoted to the discussion of possible extensions of the model developed in chapter 2. In the basic model, some restrictive assumptions were applied in order to keep the analysis simple. Now, three important aspects are introduced in the model. Of course, this cannot include all interesting extensions and the analysis is concentrated on those aspects, which are seen as the most important ones, both from a theoretical perspective and for empirical application. In addition, not all implications of these extensions are derived explicitly and the analysis is carried out with less formal rigour than in the basic model to preserve the tractability of the approach. The intention of this chapter is to give an idea for the possibility of further work within the model and to develop the most important modifications which are implied by these extensions.
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Chapter 4. The aggregation of micro-markets

Abstract
In the preceding chapters, the analysis of the model was limited to the behaviour of one firm. It has been shown that different rationing situations on the goods and labour market are possible and that the firm’s choice of employment and capacities, together with the properties of the distribution function, determine the probabilities of the regime constellations at the firm level. In the aggregate, however, at every moment in time different firms face different constraints and it is plausible that usually all rationing constellations coexist. This can be illustrated by a simple example: on the aggregate labour market normally there are both unemployment and vacancies. Even in boom periods some of the unemployed don’t find work while in recession periods with high unemployment some firms cannot fill vacancies immediately. The reasons for this can be manifold. The vacancies and the unemployed can be in different regional areas, and there is a limited degree of mobility of firms or workers between regions. Further, the workers may not have the qualifications required for the job, or the worker and the firm disagree about the wage rate and the working conditions of the job. Finally, the process of matching labour supply and labour demand takes time, thus preventing the immediate filling of vacancies. Of course, a similar consideration can be applied to the goods market. While some firms work with underutilized labour or capital, other firms cannot satisfy demand due to labour supply shortages or insufficient capacities.
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Empirical estimation

Frontmatter

Chapter 5. Specification of the model

Abstract
The first part of this work was devoted to the development of a theoretical model of the firm. The behaviour of a profit maximizing firm facing different constraints was derived, and an aggregation procedure for firms in different regimes was presented. Now it is tried to evaluate this model with an empirical application for the Federal Republic of Germany. The model is applied to the private sector of the economy. The aggregation procedure allows to investigate the behavioural relations solely by use of aggregate data which simplifies the empirical application and facilitates the interpretation of the results in terms of the business cycle. The model is estimated with quarterly data for the time period 1960–1989.1 This time period includes years of supply as well as demand shortages and the model supplies a consistent framework to investigate the main determinants of output, employment, and investment during the business cycle and therefore can provide an important part of a theory of the business cycle as well as a starting point for the analysis of long-run growth processes.
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Chapter 6. Results

Abstract
The presentation of the estimation results starts with a discussion of the productivity equations. These equations serve different functions within the model of the firm. First, the substitution decision is the most important channel, how relative factor prices influence investment and labour demand. Second, the estimation results of the productivity equations provide a first test of the assumptions applied for the derivation of the disequilibrium model of the firm. The analysis has been concentrated on short-run adjustment barriers. It has been assumed that employment and the capital stock can be adjusted only with a delay with respect to changes in the factor input demand. In addition, the production technology has been characterized by short-run limitationality between labour and capital, and output prices are assumed to change only slowly in case of demand shocks. These assumptions should result in procyclical observed productivities of labour and capital and significant underutilizations of the factors during recession periods. The presence of these underutilizations, in turn, together with the possibility of labour supply constraints, should also affect the substitution decision. Finally, the third purpose of the productivity equations is the estimation of the amount of these underutilizations to obtain an estimate of the technical productivities, which are necessary for the calculation of the labour demand and the output supply of the firm.
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Conclusion

Conclusion

Abstract
In this work, a disequilibrium model of firms’ behaviour has been developed. Disequilibrium analysis has been practiced in both meanings of the term. A dynamic model of the firm has been worked out, which pays special attention to a delayed adjustment of employment, investment, and the production technology. Market disequilibrium is introduced by allowing for a sluggish adjustment of wages and prices with respect to disequilibrium situations. In the first chapters, a consistent model of the short-run, medium-run, and long-run adjustment of the firm is developed, however, the adjustment of wages and prices is not introduced into the decision of the firm. There are three reasons which may justify this omission. First, the assumption of an immediate adjustment of wages and prices is restrictive and unrealistic. Second, a satisfactory treatment of a dynamic adjustment of wages and prices would have complicated the analysis beyond analytical tractability. Third, while the endogenous adjustment of wages and prices must be at the center of any theory of inflation and income distribution, it is not seen as very important for the quantity adjustment. This does not mean that wages and prices are not important, rather the modifications that are introduced by an endogenous price setting are seen as unessential for the quantity adjustment. In addition, in the presence of a centralized wage bargaining, the wage rate can be seen as a more or less exogenous variable for the individual firm. Therefore, the fix-price method is applied for the derivation of the model.
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Backmatter

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