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A Post-Keynesian model of the Palestinian economy: The economics of an investment-constrained economy

A Post-Keynesian model of the Palestinian economy: The economics of an investment-constrained economy

Botta, Alberto and Vaggi, Gianni (2012) A Post-Keynesian model of the Palestinian economy: The economics of an investment-constrained economy. Review of Political Economy, 24 (2). pp. 203-226. ISSN 0953-8259 (Print), 1465-3982 (Online) (doi:10.1080/09538259.2012.664332)

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Abstract

The 60-year-old Israeli-Palestinian conflict has deeply influenced the evolution of the Palestinian economy. In the last two decades political instability and the Israeli closure policy have generated protracted economic stagnation and poor capital formation. The paper describes the consequences on the Palestinian economy of existing high transaction costs and market fragmentation. We propose a simple one-sector Post-Keynesian model that describes Palestine as a demand-driven economy. We show that high transaction costs and market fragmentation discourage investment by curtailing expected profitability, reducing the size of the market and depressing entrepreneurs' animal spirits. In the short run, these two factors induce low levels of capacity utilization and low rates of capital accumulation. The situation is even more worrying in the long run when entrepreneurs can revise their expectations. Depressed animal spirits and low levels of capacity use give rise to a low-growth trap from which Palestine can hardly escape. We also highlight the possible positive impact of the removal of high transaction costs and of market fragmentation, and the ensuing beneficial effects on the long-run equilibrium values of capital accumulation and capacity use. The conclusions place these analytical results into the historical situation of the Palestinian economy, and consider what is needed, politically and economically, in order to establish a sustained development process.

Item Type: Article
Uncontrolled Keywords: Post-Keynesian growth models, Palestinian economy
Faculty / Department / Research Group: Faculty of Business > Department of International Business & Economics
Last Modified: 14 Oct 2016 09:36
Selected for GREAT 2016: None
Selected for GREAT 2017: None
Selected for GREAT 2018: None
URI: http://gala.gre.ac.uk/id/eprint/14450

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