A Theory of Economic Slack

Almost all markets have slack—unemployed workers, unsold goods, idle employees and machines, empty seats, tables, or rooms. This book builds a theory to explain why. It finds that slackish markets operate differently from Walrasian markets: they adjust through slack instead of prices and are generally inefficient. Slack also helps us understand business cycles: it lets us measure full employment, identify the shocks that disturb the economy, explain movements in unemployment and inflation, and detect recessions early. Finally, the book describes how monetary and fiscal policy should stabilize the economy when slack surges.

A draft of the book Pascual will discuss in available online here.