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Income Distribution Consensus and Macroeconomic Stability in a New Keynesian Framework

Author

Listed:
  • De Villé, Philippe

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

  • Germain, Marc

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

Abstract

It is widely agreed that conflict or consensus on macroeconomic distribution of income between firms and wage-earners is important for macroeconomic stability. A new Keynesian model is developed with nominal price rigidities prevailing because of the sequential structure of wage ; price and production decisions. The model has also very strong traditional Keynesian features : importance of the expectation by firms and of the distribution of income for the determination of employment, existence of nominal wage rigidities because of the bargaining structure. Different regimes can be identified according to two criteria : given their expectations about demand are firms " rationed " to the extent that effective demand is insufficient to absorb current potential output, actual profits being in that case smaller than expected ones ? Are workers on the other hand satisfied to the extent that the effective labor relative income share is equal or greater than the desired one ? The possible "disequilibria" set up dynamic adjustments of the nominal wage and of the demand expectations by firms. Stability of the various regimes are analyzed and some comparative static analyses of the stationary solutions are performed when either investment demand by firms or labor productivity are subjected to exogeneous change. This is done both for an "income distribution sensitive economy" and a "low demand economy". The former will more likely converge to an inflationary non-equilibrium stationary solution with lower real output and employment levels than the latter.

Suggested Citation

  • De Villé, Philippe & Germain, Marc, 1992. "Income Distribution Consensus and Macroeconomic Stability in a New Keynesian Framework," LIDAM Discussion Papers IRES 1992009, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    • Handle: RePEc:ctl:louvir:1992009
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