Keynesian dynamics and the wage-price spiral: a baseline disequilibrium model

We reformulate the traditional AS-AD growth model of the Neoclassical synthesis, stage I, as adisequilibrium approach to aggregate supply analysis, with sticky wages, sticky prices, myopic perfectforesight on current inflation rates, and adaptively formed medium-run expectations concerningthe investment and the inflation climate. Both LM curve and an interest rate policy rule are considered.The resulting nonlinear 50 model of labor and goods market disequilibrium avoids strikinganomalies of the traditional Neoclassical synthesis AS-AD model. It exhibits instead Keynesian feedbackdynamics proper with asymptotic stability for low adjustment speeds and with cyclical loss ofstability when some adjustment speeds are sufficiently large. In such cases, downward money wagerigidities serve to make the overall dynamics bounded and thus viable. We thus obtain a baselineD(is equilibrium)AS-AD model with Keynesian feedback channels with a rich set of stability/instabilityfeatures as sources of the business cycle. The outcomes of the model stand in stark contrast tothose of the currently fashionable (closely related) model of the New Keynesian alternative.