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31 décembre 2014
- handle: 10670/1.icek16
- hal: hal-01111468
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Muriel Dal-Pont Legrand et al., « Law of decreasing elasticity and Harrod’s principle of Instability », HAL-SHS : économie et finance, ID : 10670/1.icek16
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In The Trade Cycle, Roy Harrod (1936a) propounded the Law of Diminishing Elasticity of Demand. The present paper tries to clarify the precise role Harrod assigned to this law, to understand the trade cycle. We discuss the micro and macro foundations of the Law of Diminishing Elasticity of Demand and how, according to Harrod, it explains one of the main mechanisms that stabilize the economy during the trade cycle. We show how the Law of Diminishing Elasticity of Demand allowed Harrod to micro-found a non-linear saving function that can give rise to an endogenous countercyclical value of the multiplier. The paper concludes by reviewing the main arguments related to the Law of Diminishing Elasticity of Demand proposed in the late 1930s.