We did debate this paper, by Eggerston using a "continuum of goods" and got stuck on the contiuum in a constrained environment. Krugman would like the matter settled.
A recession is likely caused by the separating of a constrained set of input relative to other inputs on the distribution of elasticities. The shock should be modeled as a shock on the constrained goods, and the consumer has dropped demand down to an equilibrium below which the constraint is removed. Under this assumption, fiscal expansion must use the constrained good with greater efficiency, providing the consumer partial relief from the constraint. So, you see, government stimulus, like any stimulus, must effect the relative channel of distribution, creating an alternative equilibrium.
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