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Keynes-Metzler-Goodwin Model Building: The Closed Economy

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Abstract

In the framework of a recently established Keynesian type monetary macro model, the so-called KMG model, we study implications of kinked Phillips curves and alternative monetary policy rules. As alternative monetary policy rules we consider monetary growth targeting and interest rate targeting (the Taylor rule). Our monetary macro model exhibits: asset market clearing, disequilibrium in product and labor markets, sluggish price and quantity adjustments, two Phillips-Curves for wage and price dynamics, and a combination of medium-run adaptive and short-run forward looking expectations. Simulations of the model with our estimated parameters reveal global instability of its steady state. We show that monetary policy can stabilize the dynamics to some extent and that, in addition, an institutionally given kink in the money wage Phillips-Curve (downwardly rigid wages) represents a powerful mechanism for obtaining bounded, more or less irregular fluctuations in the place of purely explosive ones. The resulting fluctuations can be reduced in size by choosing the parameters of monetary policy within a certain corridor, the exact position of which may however be rather uncertain.

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Bibliographic Info

Paper provided by Finance Discipline Group, UTS Business School, University of Technology, Sydney in its series Working Paper Series with number 124.

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Date of creation: 01 Jan 2003
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Handle: RePEc:uts:wpaper:124

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Keywords: kmg dynamics; feedback channels; instability; monetary policy; wage floors; fluctuating growth; complex dynamics;

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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. Franke, Reiner & Lux, Thomas, 1993. " Adaptive Expectations and Perfect Foresight in a Nonlinear Metzlerian Model of the Inventory Cycle," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(3), pages 355-63.
  3. Carl Chiarella & Peter Flaschel & Reiner Franke & Willi Semmler, 2002. "Stability Analysis of a High-Dimensional Macrodynamic Model of Real-Financial Interaction: A Cascade of Matrices Approach," Working Paper Series 123, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  4. Flaschel, Peter & Gong, Gang & Semmler, Willi, 2001. "A Keynesian macroeconometric framework for the analysis of monetary policy rules," Journal of Economic Behavior & Organization, Elsevier, vol. 46(1), pages 101-136, September.
  5. Carl Chiarella & Peter Flaschel & G. Gong & Willi Semmler, 2002. "Nonlinear Phillips Curves, Complex Dynamics and Monetary Policy in a Keynesian Macro Model," Working Paper Series 120, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  6. Jordi GalĂ­, 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.
  7. Chiarella,Carl & Flaschel,Peter, 2000. "The Dynamics of Keynesian Monetary Growth," Cambridge Books, Cambridge University Press, number 9780521643511.
  8. Shone,Ronald, 2002. "Economic Dynamics," Cambridge Books, Cambridge University Press, number 9780521017039.
  9. Franke, Reiner, 1996. "A Metzlerian model of inventory growth cycles," Structural Change and Economic Dynamics, Elsevier, vol. 7(2), pages 243-262, June.
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Cited by:
  1. Velupillai, K. Vela, 2006. "A disequilibrium macrodynamic model of fluctuations," Journal of Macroeconomics, Elsevier, vol. 28(4), pages 752-767, December.
  2. Orlando Gomes, 2008. "Endogenous Growth, Price Stability and Market Disequilibria," Working Papers Series 1 ercwp0608, ISCTE-IUL, Business Research Unit (BRU-IUL).

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