Stochastic macro-equilibrium: a microfoundation for the Keynesian economics

<Para ID="Par1">In place of the standard search equilibrium, this paper presents an alternative concept of stochastic macro-equilibrium based on the principle of statistical physics. This concept of equilibrium is motivated by unspecifiable differences of economic agents and the presence of all kinds of micro shocks facing them. Our model mimics the empirically observed distribution of labor productivity. The distribution of productivity resulting from the matching of workers and firms depends crucially on aggregate demand. When aggregate demand rises, not only the unemployment rate declines, but more workers are employed by firms with higher productivity. The effect of the reservation wage on unemployment also depends on aggregate demand so that the distinction between cyclical and structural unemployment is ambiguous. The model, a general equilibrium model of monopolistic competition with friction and uncertainty provides a micro-foundation for Keynes’ principle of effective demand. Copyright Springer-Verlag Berlin Heidelberg 2015