How to Reduce Unemployment: Notes on Macro-Economic Stability and Dynamics

In this paper, I explore the out-of-equilibrium macro-economic dynamic behaviour of the Farmer’s (2010d) ME-NA model. Specifically, preserving the assumption that microeconomic adjustments are instantaneous, I build a dynamic model in continuous time that describes the macro-economic adjustments of the value of output and the interest rate. Within this framework, I show that the model economy has a unique stationary solution whose dynamics is locally stable. Moreover, simulating the model economy under the baseline calibration, I show that the adjustments towards the steady-state equilibrium occur through endogenous convergent oscillations while the most promising way out from a finance-induced recession combines a fiscal expansion with interventions aimed at altering the trade-off between holding risky and safe assets.