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The Keynesian Gospel According to Modigliani 351 r; it can be shown graphically in the lower portion of Quadrant IV. It is typically a proper fraction and it decreases with r because, as money gets more expensive, both individual and firms endeavor to reduce their cash requirements. We next note that the second component, X, is also a unique function r, given by the IS curve. Thus, the demand for money can be expressed as a function of the single variable, r: d d M P = k() r X()= r M P() r 0 (15.5) This function is graphed in Quadrant IV, with the label M d (r); it is the product of the two curves, k(r) and the IS curve. It is lower than IS because k is generally less than unity, and it is flatter because the k curve has a negative slope. To close the system, we need the (real) money supply M s /P 0 , which is shown in the figure by the horizontal line, so labeled. The Keynesian equilibrium is at the point A*, at the intersection of the money demand and supply. It results in an equilibrium r, equal to r*, shown on the r axis, and the equilibrium output X*, is at a* on IS, at the intersection of IS and the perpendicular through r*. It is an equilibrium because all markets are in equilibrium: the commodity market because X* is on IS, and the money market because A* clears the money market. To be sure, the labor market does not clear; it exhibits instead an excess supply, since the equilibrium output X* is seen to fall short of full employment X¯ , but is in Keynesian equilibrium since wage rigidity assures the stability of price and quantity in that market. And X* is stable and unique in the sense that, given the parameters underlying the figure, any value of X except X* would give rise to excess demand and supplies in non-rigid price markets which would push the system back toward X*. As an illustration, an output larger than X*, e.g., the full employment output, would not be maintainable. Indeed, from the IS in Quadrant IV, we can see that X¯ would require a value of r = r¯ < r*, and that the combination would result in a money demand shown by point A on the money demand curve, corresponding to r. But at that point, the demand is well above the money supply, M s /P 0 : there is an excess demand for money which bids up interest rates reducing I and X toward X*. And this process would continue as long as X is above X*, resulting in an excess demand for money. In short, X* is the only stable equilibrium despite the presence of unemployment, since there is no mechanism to push X from X* toward X¯ . One conceivable mechanism would be some tendency for wages to decline, at least when unemployment is large and persistent. One cannot rule this out, but recent experience confirms that this is not an effective mechanism to stabilize employment. It is for this reason that we can refer to X* as a stable Keynesian underemployment equilibrium. A return to full employment can be achieved only through appropriate policies and, in particular, through an appropriate increase in the money supply, which
352 Miscellanea creates an excess supply of money lowering interest rates toward the full employment rate r¯ and full employment output, corresponding to point a. VI Clarifications and Amplifications VI.1 Wage Rigidity is Asymmetric: Downward Only The rigidity (or stickiness) of prices and wages postulated by Keynes is asymmetric—downward only. In the presence of unemployment and unutilized capacity—demand is lower than supply—wages and prices do not fall, (and in fact are likely to continue to rise with productivity); but in any event they don’t fall quick enough in order to reestablish equilibrium. They might decline to reestablish it in what economists call the “long run,” but as Keynes has wisely warned, “in the long run we are all dead.” A gradual adjustment is not enough to avoid significant and prolonged unemployment. The situation is different if demand exceeds productive capacity. In figure 15.5, let us suppose that the Money Supply is allowed to increase above the full employment level M s ¢ so that it intercepts the Money Demand curve at a point 12.00 10.00 8.00 6.00 4.00 2.00 0.00 –2.00 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 Extrapolated Figure 15.5 Unemployment vs. investment shortfall Legend: grey broken: unemployment; grey solid: predicted; black solid: residuals Investment and unemployment in the Euro countries—1973–2001
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THE COLLECTED PAPERS OF FRANCO MODI
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Franco Modigliani in 1992.
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© 2005 Massachusetts Institute of
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CONTENTS Preface Francesco Franco I
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PREFACE The essays collected in thi
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xii Introduction decades of the twe
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THE LIFE-CYCLE HYPOTHESIS I
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4 The Life-Cycle Hypothesis them. W
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6 The Life-Cycle Hypothesis which c
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8 The Life-Cycle Hypothesis extent
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10 The Life-Cycle Hypothesis Assump
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12 The Life-Cycle Hypothesis e dy d
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14 The Life-Cycle Hypothesis We wil
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16 The Life-Cycle Hypothesis The fi
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18 The Life-Cycle Hypothesis We fee
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20 The Life-Cycle Hypothesis P = y
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22 The Life-Cycle Hypothesis y y e
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24 The Life-Cycle Hypothesis consum
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26 The Life-Cycle Hypothesis as an
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28 The Life-Cycle Hypothesis It wil
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30 The Life-Cycle Hypothesis is one
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32 The Life-Cycle Hypothesis The re
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34 The Life-Cycle Hypothesis Unfort
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36 The Life-Cycle Hypothesis basis
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38 The Life-Cycle Hypothesis 14. Fo
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40 The Life-Cycle Hypothesis 33. It
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42 The Life-Cycle Hypothesis which
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44 The Life-Cycle Hypothesis assump
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2 THE “LIFE-CYCLE” HYPOTHESIS O
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The “Life-Cycle” Hypothesis of
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(11) I C 0.634 0.080 0.634 0.092 0.
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3 LONG-RUN IMPLICATIONS OF ALTERNAT
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Long-Run Implications of Alternativ
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Table 3.1 A. Effects of Government
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4 RECENT DECLINES IN THE SAVINGS RA
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Table 4.1 (continued) Regression Va
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Recent Declines in the Savings Rate
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Table 4.2 (continued) First Differe
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Table 4.3 Period & estimation Surpl
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Table 4.4 The Role of Major Variabl
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Table 4.5 Estimates for Developing
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Table 4.6 (continued) Savings Growt
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5 THE AGE-SAVING PROFILE AND THE LI
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The Age Saving Profile 143 It is ob
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The Age Saving Profile 145 The exer
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The Age Saving Profile 147 same coh
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The Age Saving Profile 149 therefor
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The Age Saving Profile 151 One poss
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The Age Saving Profile 153 0 50 100
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The Age Saving Profile 155 0 5 10 1
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The Age Saving Profile 157 -10 -5 0
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10 40 45 Median discretionary savin
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The Age Saving Profile 161 effect f
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The Age Saving Profile 163 between
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The Age Saving Profile 165 tion. Si
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The Age Saving Profile 167 to save
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The Age Saving Profile 169 sampling
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The Age Saving Profile 171 10. One
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6 THE CHINESE SAVING PUZZLE AND THE
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Table 6.1 Chinese Household Income
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The Chinese Saving Puzzle 177 the p
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The Chinese Saving Puzzle 179 Even
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The Chinese Saving Puzzle 181 those
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The Chinese Saving Puzzle 183 3.3.2
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The Chinese Saving Puzzle 185 3. S(
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The Chinese Saving Puzzle 187 ddpCY
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Table 6.3 Estimates of Coefficients
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The Chinese Saving Puzzle 191 respe
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The Chinese Saving Puzzle 193 These
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The Chinese Saving Puzzle 195 marke
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The Chinese Saving Puzzle 197 coeff
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The Chinese Saving Puzzle 199 6 Con
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The Chinese Saving Puzzle 201 Accor
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The Chinese Saving Puzzle 203 Appen
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The Chinese Saving Puzzle 205 Horio
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7 AN ECONOMISTS’ MANIFESTO ON UNE
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An Economists’ Manifesto on Unemp
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240 Unemployment and Monetary Polic
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11 LONG-TERM FINANCING IN AN INFLAT
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Long-Term Financing in an Inflation
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Long-Term Financing in an Inflation
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12 RISK-ADJUSTED PERFORMANCE: HOW T
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Risk-Adjusted Performance 291 portf
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Risk-Adjusted Performance 293 sugge
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Risk-Adjusted Performance 295 Nonet
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Risk-Adjusted Performance 297 relat
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Risk-Adjusted Performance 299 On th
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Page 322 and 323: The Rules of the Game and the Devel
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Page 343 and 344: 328 Miscellanea mammoth unemploymen
Page 345 and 346: 330 Miscellanea important one at th
Page 347 and 348: 332 Miscellanea M M s M d M d Figur
Page 349 and 350: 334 Miscellanea the flexibility of
Page 351 and 352: 336 Miscellanea Table 15.1 (continu
Page 353 and 354: 338 Miscellanea Table 15.2 Unemploy
Page 355 and 356: 340 Miscellanea Table 15.2 (continu
Page 357 and 358: 342 Miscellanea are equal: one must
Page 359 and 360: 344 Miscellanea For the purpose of
Page 361 and 362: 346 Miscellanea IV.4 The Saving—I
Page 363 and 364: 348 Miscellanea corresponding axis
Page 365: 350 Miscellanea understood however
Page 369 and 370: 354 Miscellanea short of totalitari
Page 371 and 372: 356 Miscellanea VI.5 The Role of Fi
Page 373 and 374: 358 Miscellanea flexible nominal wa
Page 376: INTERVIEW IV
Page 379 and 380: 364 Interview at Modigliani’s vac
Page 381 and 382: 366 Interview Solow: Now, with Mars
Page 383 and 384: 368 Interview in employment. When t
Page 385 and 386: 370 Interview interest elasticity o
Page 387 and 388: 372 Interview industries such as ag
Page 389 and 390: 374 Interview The theorem, which by
Page 391 and 392: 376 Interview governmental finance
Page 393 and 394: 378 Interview Solow: You had a majo
Page 395 and 396: 380 Interview consequences of “Pe
Page 397 and 398: 382 Interview century, to below 6 p
Page 400 and 401: INDEX Accelerator effect, 221 Accou
Page 402 and 403: Index 387 Coefficients of the aggre
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Page 406 and 407: Index 391 cash, 142, 143 in China,
Page 408 and 409: Index 393 and open economy, 358 and
Page 410 and 411: Index 395 Monetary policy argument
Page 412 and 413: Index 397 Real wages. See Wages, re
Page 414 and 415: Index 399 Tanzania, income and savi
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Index 401 “Wedge” between pay a
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