Inter-Regional Factor Allocation in the Neo-Keynesian Macroeconomic Model

Abstract

The standard neoclassical Two-Sector Model of inter-regional factor allocation says that apositive demand shock in one region starts immigration of both labour and capital, but that theadjustment of market prices eventually reproduces the inter-regional equilibrium. In the Neo-Keynesian macroeconomic framework of this paper, however, both the initial effects of thedemand shock and the adjustment path to the new equilibrium are different. Under PerfectForesight or under Rational Expectations the factors do not move at all, but under AdaptiveExpectations the factors are induced to move in the short run. However, the factors move inopposite directions: a positive demand shock causes capital to immigrate and labour toemigrate. Inter-regional factor migration is an alternative to the intra-regional adaptation ofpeople’s expectations, which is the original rationale of the Adaptive Expectations Hypothesis.