Cooperative Responses by Public and Private Agents to Aggregate Demand and Supply Disturbances

Bibliographic Data

ID9727693
AuthorsGary C Fethke, Andrew J Policano
Year1981
Volume48
Issue190
Pages155
Publication date1981-05-01
Open AccessNo
TypeARTICLE
VenueEconomica (JOURNAL)
Journal identifiersISSN: 0013-0427 • E-ISSN: 1468-0335
PublisherJSTOR (PUBLISHER)
DOI10.2307/2553480
OpenAlexW2023480678
LanguageEN
Citations received1
References cited6

Macroeconomic literature concerned with stabilizing aggregate employment often focuses on the monetary authority's ability to react to persistent disturbances in aggregate demand. This attention reflects the Keynesian emphasis on demand as the primary determinant of fluctuations in real economic activity, as well as the historically greater variability of demand as compared with supply disturbances. In recent years, however, it has become increasingly apparent that supply shocks not only disrupt the economy but can lead to movements in employment, output and prices that are unlike the movements of these variables in response to demand disturbances. Since supply-side phenomena such as crop failures, oil embargoes and general increases in prices of primary materials frequently accompany demand shocks, it can be difficult for either public or private economic agents to develop effective methods for stabilizing employment. The public authority's response to these conditions includes the consideration and introduction of new policing strategies, including wage and price guidelines, tax-based incomes policies, and supply-management fiscal programmes.' The purpose of this analysis is a comparison of monetary policy, a wage-subsidy programme, and a private-sector indexation strategy in a setting where observed aggregate disturbances are a composite of demand and supply shocks. Agents obtain information about current aggregate disturbances by observing the current price level, but this information does not permit unique identification of the underlying contributors. A price increase, for example, can result from an increase in aggregate demand, a decrease in aggregate supply or a combination of these factors. Agents rely on information contained in the price level and their knowledge of the properties of underlying demand and supply disturbances to formulate expectations of the relative importance of each shock. We initially adopt the position that, while all agents form rational predictions of unobservable variables, private agents expect the public authority to react, via a known rule, to the information contained in the price level by adjusting the money supply or by implementing short-term fiscal measures. This cooperative posture occurs because the public authority is able to formulate contingent rules that are not readily available to private agents. A role for monetary and fiscal policy develops from a relative cost advantage of public over private agents in forming these contingent contracts. We focus on a comparison of a standard form of monetary policy with one supply-side fiscal programme, a wage subsidy given to firms. Since the latter programme has recently been advocated as a way of increasing employment without first requiring an increase in the price level, it seems to be a suitable tool to contrast with monetary policy, particularly in response to supply-side shocks. As an alternative to the setting of contingent rules by the public authority, we briefly consider the situation where private agents choose to index the nominal wage to changes in the price level

Aggregate demand · Aggregate supply · Demand management · Demand shock · Economics · Inflation (cosmology) · Labour economics · Macroeconomics · Market economy · Monetary economics · Monetary policy · Private sector · Subsidy · Supply and demand · Wage · Economic theories and models · Economic Theory and Policy · Monetary Policy and Economic Impact

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