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Macroeconomic Fluctuations in a Stylized DSGE Model with Disequilibrium Dynamics

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  • Bas van Aarle

Abstract

This study develops a stylised DSGE model, that departs in one aspect: it replaces the general equilibrium approach by disequilibrium economics. In this way, richer macroeconomic adjustment dynamics result, as it is not necessary to assume that goods and labour markets continuously clear. The disequilibrium dynamics – in the form of regime-dependent output and employment fluctuations, wage and price adjustments-complicate (viz. enrich) the decision making problems faced by the fiscal and monetary policymakers. In particular the possibility of (multiple) regime switches implies the need for deeper analysis and monitoring of the disequilibrium mechanisms when designing and implementing monetary and fiscal policies.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4017.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_4017

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Keywords: disequilibrium analysis; DSGE model; macroeconomic policy;

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  1. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  2. Lars E. O. Svensson, 2000. "Open-Economy Inflation Targeting," NBER Working Papers 6545, National Bureau of Economic Research, Inc.
  3. Benassy Jean-pascal, 1974. "Neokeynesian disequilibrium theory in a monetary economy," CEPREMAP Working Papers (Couverture Orange) 7402, CEPREMAP.
  4. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
  5. Söderström, Ulf & Söderlind, Paul & Vredin, Anders, 2002. "New-Keynesian Models and Monetary Policy: A Reexamination of the Stylized Facts," Working Paper Series in Economics and Finance 511, Stockholm School of Economics, revised 15 Aug 2003.
  6. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March.
  7. Coenen, Günter & Mohr, Matthias & Straub, Roland, 2008. "Fiscal consolidation in the euro area: long-run benefits and short-run costs," Working Paper Series 0902, European Central Bank.
  8. Fabio Milani, 2009. "Adaptive Learning and Macroeconomic Inertia in the Euro Area," Journal of Common Market Studies, Wiley Blackwell, vol. 47, pages 579-599, 06.
  9. Grossman, Herschel I, 1973. "Aggregate Demand, Job Search, and Employment," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1353-69, Nov.-Dec..
  10. Grossman, Herschel I, 1971. "Money, Interest, and Prices in Market Disequilibrium," Journal of Political Economy, University of Chicago Press, vol. 79(5), pages 943-61, Sept.-Oct.
  11. Arcand, Jean-Louis L. & Brezis, Elise S., 1993. "Disequilibrium dynamics during the great depression," Journal of Macroeconomics, Elsevier, vol. 15(3), pages 553-589.
  12. Dieppe, Alistair & Henry, Jerome, 2004. "The euro area viewed as a single economy: how does it respond to shocks?," Economic Modelling, Elsevier, vol. 21(5), pages 833-875, September.
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