In considering the Origin of Species, it is quite conceivable that a naturalist, reflecting on the similarities of organic beings, their geographical distribution, geological succession, and other such facts, might come to the conclusion that each species had not been independently created, but had descended, like varieties, from other species. Nevertheless, such a conclusion, even if well founded, would be unsatisfactory, until it could be shown how the innumerable species inhabiting this world have been modified so as to acquire that perfection of structure and co-adaptation which most justly excites our admiration.
Income inequality has risen in the United States and United Kingdom since the 1980s. There are several views that emphasise that this situation is the outcome of institutional factors such as deregulation, privatisation, tax reform favourable to high-income earners, reform of social security system, decreasing income transfer and attack on trade unions (Freeman and Katz, 1994; Pontusson, 2005; Krugman, 2007; Goldin and Katz, 2007).
However, the most popular view is the skill-biased technological change (SBTC) hypothesis wherein the main cause of rising income inequality is the demand shift towards skilled labour through the diffusion of the ‘IT-related technique’ (Berman, Bound and Griliches, 1994; Autor, Katz and Krueger, 1998; Autor, Katz and Kearney, 2005). As the SBTC hypothesis assumes that wages are determined chiefly by the supply-demand condition in the labour market, the demand shift towards skilled labour raises the wages of skilled workers. On the other hand, there are some studies that emphasised the influence of globalisation. This view is divided into two hypotheses.
Recessions are often attributed in popular opinion and by policymakers to large, identifiable, negative shocks, which hit specific important sectors. For example, the slow recovery from the last U.S. recession was attributed to the attacks of September 11, 2001, which hit the travel sector. Terrorism also hurt tourist destinations like Israel, while natural disasters wrecked the tourism and fishing sectors in Louisiana (Hurricane Katrina) and South Asia (the 2004 tsunami).
It is not obvious how such a temporary sectoral shock gets propagated across sectors and through time, thus affecting the entire economy negatively even after it is gone. This paper discusses one propagation mechanism and demonstrates it in an environment that is based on the monetary search model of Kiyotaki and Wright (1989, 1993). Since that model is supposedly too narrow for analyzing broad macroeconomic issues, I explain the intuition up front. In the model there are n types of agents and goods, and agents specialize in production and consumption: Type i produces good i and consumes good i+1 (mod n). If the production of good i is temporarily impossible the income of type i agents is reduced. They will buy less of their consumption good, good i+1, next period. Their low demand for good i+1 will, in turn, reduce the money holdings of that good’s producers type i+1 agents so those agents will later buy less of good i+2, and so on. The propagation of the shock continues in a chain reaction from one sector to another even if the shock to good i lasts only one period.
