The macroeconomics of down-shifting: a suitable case for modelling?

Economics Australia

Down-shifting is an ugly word for a beautiful phenomenon: people reshaping their lives to enjoy more leisure and less income, less stress and – crucially – lower levels of consumption. Mainstream economists tend to stop at this point, treating down-shifting as nothing more or less than a welfare-improving reallocation of resources. There are good reasons for worrying about the macroeconomic consequences of down-shifting. In the short period, elementary Keynesian theory suggests potentially serious consequences if consumption expenditure slows down or falls. The accelerator principle links business investment expenditure to the rate of growth of consumption, so that down-shifting may have disastrous effects on investment unless offsetting monetary or (more plausibly) fiscal policy measures are in place.

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