The effect of demand shocks is studied within an economy characterized by a temporally articulated production structure and bound by rational agents. Hicks’ (1973) model is extended in order to include trade between two economies with demand links. This allows to tackle issues as the transmission of shocks and the coordination of monetary policies. By means of numerical simulations the author shows that because of irreversibilities, temporary demand shocks trigger disequilibrium dynamics with permanent effect on the economy. Market imperfections, namely a certain degree of wage and price stickiness, prove necessary to avoid the implosion of the system. An accommodating monetary policy, by softening financial constraints, is effective in stabilizing the economy. When considering trading economies, a certain degree of openness has positive effects, and independent monetary policies may in some occasions be desirable.

This paper studies the effects of demand shocks within an economy characterized by a temporally articulated productive structure. It builds on the Neoaustrian model, introduced by Hicks (1970, 1973) and developed by Amendola and Gaffard (1998). This setting allows the study of economic systems along a dimension that is usually neglected, namely the intertemporal coordination of economic activity. The standard Walrasian approach, based on the costless coordinating services of the auctioneer, assumes away any type of coordination problem. Agents’ plans are always harmonized, and the instantaneity of the production process avoids problems of coordination over time. Many crucial properties of the system, as the uniqueness and optimality of the equilibrium, can be proved in a sufficiently general setting only when coordination is assumed (Howitt, 1990).

The problem of intertemporal coordination is at the center of the research program initiated by Hicks in the early 1970s. Its defining characteristic is the temporal structure of production, modeled by considering vertically integrated processes that use labor in two distinct (and successive) phases: First construction of productive capacity and then its utilization. Such a representation allows the analysis of transition paths between equilibria (the traverse), whose insights would be impossible to derive using the standard, instantaneous representation of production.