Wage – Price Dynamics and Financial Market in a Disequilibrium Macro Model : A Keynes – Kaldor – Minsky Modeling of Recession and Inflation Using VECM

This paper studies wage-price dynamics in the context of a disequilibrium macro model where there are two Phillips (PC) curves, a wage PC and price PC. We adapt this framework but introduce a Kaldorian delay effect in wage dynamics whereby output and sales predate wage dynamics. Though along Keynesian lines aggregate demand drives output, but output is also impacted from the supply side, through some Minsky - Kindleberger financial conditions, possibly enhancing inflation through bottlenecks and supply constraints. Central banks when raising the interest rates and/or worsening financial conditions to counteract inflation may then actually accelerate the inflation rate, in particular when there are financially generated bottlenecks and external non-stationary variables, like fossil energy and food costs, at work as exogenous drivers of the inflation rate. These features are first studied in a disequilibrium intertemporal dynamic macroeconomic model but then empirically explored in a mixed Vector Error Correction Model (VECM) with a mix of stationary and non-stationary variables. Nonlinearities in the dynamics and regime switching are shown to be essential in disequilibrium macrodynamics, here first studied analytically and then econometrically, also exploring the permanent and transitory effects of shocks