ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Paradox of a Supply Constrained Keynesian Equilibrium

The COVID-19 Case

The Indian economy, which was facing demand defi ciency and slowdown prior to the Covid-19 outbreak, plunged further with the lockdown. The present exercise represents the current problem as a typical demand constrained Keynesian equilibrium, affl icted further by demand and supply failures generated by transaction costs. The resulting scenario resembles a “supply constrained” Keynesian equilibrium. The article looks at the possible impact on prices and discusses the implications of select policy interventions for such an economy.

The authors wish to thank Pradip Maiti for helpful discussions on the draft. The Reserve Bank of India and the Indian Council of Social Science Research are acknowledged for their support to ISEC, Bengaluru.

The Indian economy, which was facing demand deficiency and slowdown prior to the Covid-19 outbreak, plunged further with the lockdown. The present exercise represents the current problem as a typical demand constrained Keynesian equilibrium, afflicted further by demand and supply failures generated by transaction costs. The resulting scenario resembles a “supply constrained” Keynesian equilibrium. The article looks at the possible impact on prices and discusses the implications of select policy interventions for such an economy.

In the context of a medico-economic calamity that has come to visit the entire world with the COVID-19 outbreak, when some economists are apprehending the reappearance of another Great Depression IMF (2020b), and fiscal stimuli and liquidity easing have turned into commonly discussed tools for treating economies trapped in the quicksand of economic inactivity, this article seeks to outline, in a textbook language, how this economic storm may be viewed. To begin with, however, we need to take stock of the recent history.

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Updated On : 23rd Dec, 2020
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