When Demand Creates its Own Supply: Saving Traps

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HALSHS : archive ouverte en Sciences de l’Homme et de la Société

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info:eu-repo/semantics/altIdentifier/doi/10.1093/restud/rdt041

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Credit constraint Financial crisis Private debt Say’s Law Saving trap

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Balancing (Physics) Balance (Physics) Balance

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Christophe Chamley, « When Demand Creates its Own Supply: Saving Traps », HALSHS : archive ouverte en Sciences de l’Homme et de la Société, ID : 10.1093/restud/rdt041

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Abstract En

The mechanism by which aggregate supply creates the income that generates its matching demand (called Say’s Law), may not work in a general equilibrium with decentralized markets and savings in bonds or money. Full employment is an equilibrium, but convergence to that state is slow. A self-fulfilling precautionary motive to accumulate bonds (with a zero aggregate supply) can set the economy on an equilibrium path with a fast convergence towards a steady state with unemployment that may be an absorbing state from which no equilibrium path emerges to restore full employment.

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