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Keynesian Dynamics and the Wage-Price Spiral: A Baseline Disequilibrium Model

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We reformulate and extend the standard AS-AD growth model of the Neoclassical Synthesis (stage I) with its traditional microfoundations. The model retains an LM curve in the place of a Taylor interest rate rule, exhibits sticky wages as well as sticky prices, myopic perfect foresight of current inflation rates and adaptively formed medium-run expectations concerning the investment and the inflation climate in which the economy is operating. The resulting nonlinear 5D model of labor and goods market disequilibrium dynamics avoids the striking anomalies of the standard AS-AD model of the Neoclassical synthesis (stage I). It exhibits instead Keynesian feedback dynamics proper with, in particular, asymptotic stability of its unique interior steady state for low adjustment speeds and with cyclical loss of stability ? by way of Hopf bifurcations ? when some adjustment speeds are made suciently large, eventually leading to purely explosive dynamics. In such cases, downward money wage rigidity serves to make the overall dynamics bounded and thus viable. We thus obtain and analyze a baseline D(isequilibrium)AS-AD model characterised by Keynesian feedback channels with a rich set of stability/instability features as the sources of the business cycle. The outcomes of the model stand in stark contrast to those of the currently fashionable baseline model of the New Keynesian alternative (the Neoclassical Synthesis, stage II) that we suggest is more limited in scope.

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Paper provided by Finance Discipline Group, UTS Business School, University of Technology, Sydney in its series Working Paper Series with number 139.

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Date of creation: 01 Dec 2004
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Publication status: Published as: Asada, T., Chen, P., Chiarella, C. and Flaschel, P., 2006, "Keynesian Dynamics and the Wage-Price Spiral: A Baseline Disequilibrium Model", Journal of Macroeconomics, 28(1), 90-130.
Handle: RePEc:uts:wpaper:139

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Keywords: DAS-AD growth; wage and price Phillips curves; real interest e ects; real wage effects; (in)stability; persistent cycles; inflation and deflation;

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  1. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  2. 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.
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  8. Pu Chen & Carl Chiarella & Peter Flaschel & Hing Hung, 2006. "Keynesian Disequilibrium Dynamics: Convergence, Roads to Instability and the Emergence of Complex Business Fluctuations," Working Paper Series 146, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  9. Chiarella, Carl & Flaschel, Peter, 1996. "Real and monetary cycles in models of Keynes-Wicksell type," Journal of Economic Behavior & Organization, Elsevier, vol. 30(3), pages 327-351, September.
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  12. 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.
  13. Chiarella,Carl & Flaschel,Peter, 2011. "The Dynamics of Keynesian Monetary Growth," Cambridge Books, Cambridge University Press, number 9780521180184, October.
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Cited by:
  1. Rodolphe Dos Santos Ferreira & Philippe Michel, 2013. "Keynes' Wage–Price Dynamics," Metroeconomica, Wiley Blackwell, vol. 64(1), pages 44-72, 02.
  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. Datta, Soumya, 2013. "Robustness and Stability of Limit Cycles in a Class of Planar Dynamical Systems," MPRA Paper 50814, University Library of Munich, Germany.
  4. Asada, Toichiro, 2006. "Stabilization policy in a Keynes-Goodwin model with debt accumulation," Structural Change and Economic Dynamics, Elsevier, vol. 17(4), pages 466-485, December.
  5. Malikane, Christopher, 2012. "The Microfoundations of the Keynesian Wage-Price Spiral," MPRA Paper 42923, University Library of Munich, Germany, revised 2012.
  6. Christian Proaño Acosta, 2007. "Gradual Wage-Price Adjustments, Labour Market Frictions and Monetary Policy Rules," IMK Working Paper 09-2007, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  7. Ekkehard Ernst & Peter Flaschel & Christian Proano & Willi Semmler, 2006. "Disequilibrium Macroeconomic Dynamics, Income Distribution and Wage-Price Phillips Curves," IMK Working Paper 04-2006, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  8. Piero Ferri, 2006. "Fluttuazioni endogene, deflazione da debiti e instabilità finanziaria," Moneta e Credito, Economia civile, vol. 59(234), pages 129-149.
  9. Wintoki, M. Babajide & Linck, James S. & Netter, Jeffry M., 2012. "Endogeneity and the dynamics of internal corporate governance," Journal of Financial Economics, Elsevier, vol. 105(3), pages 581-606.
  10. Bernd Hayo & Britta Niehof, 2014. "Analysis of Monetary Policy Responses After Financial Market Crises in a Continuous Time New Keynesian Model," MAGKS Papers on Economics 201421, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  11. Malikane, Christopher & Mokoka, Tshepo, 2012. "Monetary policy credibility: A Phillips curve view," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(3), pages 266-271.
  12. Christopher Malikane & Willi Semmler, 2008. "Asset Prices, Output And Monetary Policy In A Small Open Economy," Metroeconomica, Wiley Blackwell, vol. 59(4), pages 666-686, November.

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