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Keynesian Dynamics and the Wage-Price Spiral:Estimating a Baseline Disequilibrium Approach

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  • C. Chiarella
  • P. Chen

Abstract

We reformulate the baseline disequilibrium AS-AD model of Asada et al. (2004) to make it applicable for empirical estimation. The model now exhibits a Taylor interest rate rule in the place of an LM curve, a dynamic IS curve and dynamic employment adjustment. It is based on sticky wages and prices, perfect foresight of current inflation rates and adaptive expectations concerning the inflation climate in which the economy is operating. The implied nonlinear 5D model of real markets disequilibrium dynamics avoids anomalies of the Neoclassical synthesis (Stage I). It exhibits Keynesian feedback structures with asymptotic stability of its steady state for low adjustment speeds and with cyclical loss of stability when adjustment speeds are made sufficiently large. In the second part we estimated the equations of the model to study its stability features from the empirical point of view with respect to the feedback chains it exhibits. Based on these estimates we also study to which extent a Blanchard and Katz error correction mechanism, more pronounced interest rate feedback rules or downward wage rigidity can stabilize the dynamics in the large when the steady state is locally repelling. The achievements of this baseline disequilibrium AS-AD model and its Keynesian feedback channels can be usefully contrasted with those of the microfounded, but in scope more limited now fashionable New Keynesian alternative (the Neoclassical Synthesiso, Stage II

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 149.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:149

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Keywords: DAS-AD growth; wage and price Phillips curves; adverse real wage adjustment; (in)stability; persistent business cycles;

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  1. Hans-Martin Krolzig & Peter Flaschel, 2003. "Wage and Price Phillips Curves An empirical analysis of destabilizing wage-price spirals," Economics Series Working Papers 2003-W16, University of Oxford, Department of Economics.
  2. Tobin, James, 1975. "Keynesian Models of Recession and Depression," American Economic Review, American Economic Association, vol. 65(2), pages 195-202, May.
  3. Olivier Jean Blanchard & Lawrence Katz, 1999. "Wage Dynamics: Reconciling Theory and Evidence," NBER Working Papers 6924, National Bureau of Economic Research, Inc.
  4. Chiarella,Carl & Flaschel,Peter, 2000. "The Dynamics of Keynesian Monetary Growth," Cambridge Books, Cambridge University Press, number 9780521643511.
  5. T. Asada & P. Chen, 2004. "Keynesian Dynamics and the wage price spiral. A baseline disequilibrium approach," Computing in Economics and Finance 2004 262, Society for Computational Economics.
  6. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Working Papers in Applied Economic Theory 98-03, Federal Reserve Bank of San Francisco.
  7. Peter Flaschel & Göran Kauermann & Willi Semmler, 2007. "Testing Wage And Price Phillips Curves For The United States," Metroeconomica, Wiley Blackwell, vol. 58(4), pages 550-581, November.
  8. Jordi Galí, 2000. "The return of the Phillips curve and other recent developments in business cycle theory," Spanish Economic Review, Springer, vol. 2(1), pages 1-10.
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Cited by:
  1. Pu Chen & Peter Flaschel, 2005. "Keynesian Dynamics and the Wage–Price Spiral: Identifying Downward Rigidities," Computational Economics, Society for Computational Economics, vol. 25(1), pages 115-142, February.
  2. Hallegatte, Stéphane & Ghil, Michael & Dumas, Patrice & Hourcade, Jean-Charles, 2008. "Business cycles, bifurcations and chaos in a neo-classical model with investment dynamics," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 57-77, July.
  3. Toichiro Asada & Pu Chen & Carl Chiarella & Peter Flaschel, 2004. "Keynesian Dynamics and the Wage Price Spiral. A Baseline Disequilibrium Approach," Macroeconomics 0409001, EconWPA.

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