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The Stability of Full Employment. A Reconstruction of Chapter 19-Keynesianism

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Author Info
Hansjoerg Klausinger () (Department of Economics, Vienna University of Economics & B.A.)

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Abstract

In the vein of chapter 19 of Keynes's "General Theory" the following study investigates the dynamic properties of the traditional Keynesian model of the neoclassical synthesis. The dynamics (stability vs. instability, monotonic vs. oscillatory adjustment) is examined - in the absence of active stabilisation policy, that is assuming, in particular, monetary policy to follow Friedman's constant money growth-rule - by appending a wage Phillips curve (with inflationary expectations) and adaptive expectations (with rational expectations as a limiting case) to the static model. Furthermore two regimes are distinguished: on the one hand the "flexible- interest-rate-regime" where the nominal interest rate is free to move and on the other hand the "zero-interest- rate-regime" (similar to the Keynesian "liquidity trap") where the non-negativity restriction on the nominal interest rate becomes binding. Some of the conclusions are (i) that although possibly stable within the flexible- interest-regime the system as a whole might exhibit corridor stability", (ii) that wage flexibility can be (and that the inclusion of inflationary expectations into the Phillips curve certainly is) destabilising, and (iii) that increasing the rate of steady-state inflation makes it "more probable" that full-employment equilibrium isstable.

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Paper provided by Vienna University of Economics and B.A., Department of Economics in its series Department of Economics Working Papers with number wuwp063.

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Date of creation: Apr 1999
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Handle: RePEc:wiw:wiwwuw:wuwp063

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  1. Howitt, Peter W, 1978. " The Limits to Stability of a Full-employment Equilibrium," Scandinavian Journal of Economics, Blackwell Publishing, vol. 80(3), pages 265-82.
  2. Tobin, James, 1975. "Keynesian Models of Recession and Depression," American Economic Review, American Economic Association, vol. 65(2), pages 195-202, May. [Downloadable!] (restricted)
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  3. Dimand, R.W., 1994. "Irving Fisher, J.M. Keynes and the Transition to Modern Macroeconomics," Working Papers 1994-19, Brock University, Department of Economics.
  4. Collard, David, 1996. "Pigou and Modern Business Cycle Theory," Economic Journal, Royal Economic Society, vol. 106(437), pages 912-24, July. [Downloadable!] (restricted)
  5. De Long, James Bradford & Summers, Lawrence H, 1986. "Is Increased Price Flexibility Stabilizing?," American Economic Review, American Economic Association, vol. 76(5), pages 1031-44, December. [Downloadable!] (restricted)
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  6. Bennett T. McCallum, 1987. "On "Real" and "Sticky-Price" Theories of the Business Cycle," NBER Working Papers 1933, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Tobin, James, 1993. "Price Flexibility and Output Stability: An Old Keynesian View," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 45-65, Winter. [Downloadable!] (restricted)
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  8. Lofgren, Karl-Gustaf, 1979. " The Corridor and Local Stability of the Effective Excess Demand Hypothesis: A Result," Scandinavian Journal of Economics, Blackwell Publishing, vol. 81(1), pages 30-47.
  9. Dimand, Robert W, 1994. "Irving Fisher's Debt-Deflation Theory of Great Depressions," Review of Social Economy, Taylor and Francis Journals, vol. 52(1), pages 92-107, Spring.
  10. Collard, David A, 1983. "Pigou on Expectations and the Cycle," Economic Journal, Royal Economic Society, vol. 93(37), pages 411-14, June. [Downloadable!] (restricted)
  11. Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, University of Chicago Press, vol. 71, pages 280. [Downloadable!] (restricted)
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