On the one hand, this type of paper feels to me like engineered wheel-reinvention. It is microfoundations tuned to give a desired macroeconomic result, but its microfoundations are not real: we have no statistical mechanics in economics to get us from the real microfoundations to emergent macro properties like pressure and temperature. All we have are just-so stories: "if these were the microfoundations, then..." Nevertheless, this is a very, very nice example of the genre. And lots of people find this kind of thing very useful, or at least comforting. So I am probably wrong in my lack of enthusiasm here: Daniel Murphy: Excess Capacity in a Fixed Cost Economy https://economics.virginia.edu/sites/economics.virginia.edu/files/macro/murphy.pdf: '[When] firms... face only fixed costs over a range of output... equilibrium output and income depend on consumer demand rather than available supply, even when prices are flexible and there are no other frictions. The theory matches the procyclicality of capacity utilization, firm entry, and markups. A heterogeneous household version of the model demonstrates how an economy can enter a capacity trap in response to a temporary negative demand shock: When demand by some consumers falls temporarily, other consumers’ permanent income (and hence their desired consumption) falls. Since output is demand-determined, the permanent fall in desired consumption causes a permanent state of excess capacity...


#noted #2019-12-26

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