Keynesian dynamics and the wage-price spiral: a baseline disequilibrium approach
We reformulate and extend the standard AS-AD growth model of the NeoclassicalSynthesis (stage I) with its traditional microfoundations. The model still hasan LM curve in the place of a Taylor interest rate rule, exhibits sticky wages as wellas sticky prices, myopic perfect foresight of current inflation rates and adaptivelyformed medium-run expectations concerning the investment and the inflation elimatein which the economy is operating. The resulting nonlinear 5D model oflabor and goods market disequilibrium dynamics avoids striking anomalies of thestandard AS-AD model of the Neoclassical synthesis (stage I). It exhibits insteadKeynesian feedback dynamics proper with in particular asymptotic stability of itsunique interior steady state for low adjustment speeds and with cyclical loss ofstability - by way of Hopf bifurcations - when some adjustment speeds are madesufficiently large, even leading to purely explosive dynamics soon thereafter. Insuch cases, downward money wage rigidity is of use to make the overall dynamicsbounded and thus viable.In this way we obtain and analyze a baseline DAS-AD model with Keynesianfeedback channels with a rich set. of stability features as sources of the businesscycle. These outcomes of the model stand in stark contrast to those of the currentlyfashionable New Keynesian alternative (the Neoclassical Synthesis, stage II) thatwe suggest is much more limited in scope.
Year of publication: |
2004
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Authors: | Asada Toichiro ; Chen Pu ; Chiarella Carl ; Flaschel Peter |
Publisher: |
Economics Society of Australia |
Saved in:
freely available
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