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Keynesian Dynamics and the Wage Price Spiral. A Baseline Disequilibrium Approach

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Author Info

  • Toichiro Asada

    (Faculty of Economics, Chuo University)

  • Pu Chen

    (Faculty of Economics, Bielefeld University)

  • Carl Chiarella

    (School of Finance & Economics, University of Technology, Sydney)

  • Peter Flaschel

    (Faculty of Economics, Bielefeld University)

Abstract

We reformulate and extend the standard AS-AD growth model of the Neoclassical Synthesis (Stage I) with its traditional microfoundations. The model still has 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 inflation climate in which the economy is operating. The resulting nonlinear 5D model of labor and goods market disequilibrium dynamics avoids striking anomalies of the standard 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 suficiently large, even leading to purely explosive dynamics sooner or later. In such cases downward money wage rigidity can be used to make the dynamics bounded and thus viable. In this way we obtain and analyze a baseline DAS-AD model with Keynesian feedback channels whose rich set of stability features is the source of business cycle fluctuations. These outcomes of the model stand in contrast to those of the currently fashionable New Keynesian alternative (the Neoclassical Synthesis, Stage II) that we suggest is more limited in scope.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0409001.

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Length: 41 pages
Date of creation: 01 Sep 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0409001

Note: Type of Document - pdf; pages: 41
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Web page: http://128.118.178.162

Related research

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

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References

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  1. N. Gregory Mankiw, 2000. "The Inexorable and Mysterious Tradeoff Between Inflation and Unemployment," Harvard Institute of Economic Research Working Papers 1905, Harvard - Institute of Economic Research.
  2. 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.
  3. Peter Flaschel & Hans-Martin Krolzig, 2003. "Wage and Price Phillips Curves An empirical analysis of destabilizing wage-price spirals," Economics Papers 2003-W16, Economics Group, Nuffield College, University of Oxford.
  4. W. Semmler & P. Chen & C. Chiarella, 2005. "Keynesian Dynamics and the Wage-Price Spiral:Estimating and Analyzing a Baseline Disequilibrium Approach," Computing in Economics and Finance 2005 211, Society for Computational Economics.
  5. Svensson, Lars E.O. & Rudebusch , Glenn, 1998. "Policy Rules for Inflation Targeting," Seminar Papers 637, Stockholm University, Institute for International Economic Studies.
  6. Olivier Jean Blanchard & Lawrence Katz, 1999. "Wage Dynamics: Reconciling Theory and Evidence," NBER Working Papers 6924, National Bureau of Economic Research, Inc.
  7. C. Chiarella & P. Chen, 2004. "Keynesian Dynamics and the Wage-Price Spiral:Estimating a Baseline Disequilibrium Approach," Computing in Economics and Finance 2004 149, Society for Computational Economics.
  8. R. Luce & M. Raith & E. Rasmusen & S. Grosskopf & K. Velupillai & W. Pauwels & E. Furubotn & P. Schmitz & S. Napel, 2000. "Book reviews," Journal of Economics, Springer, vol. 71(3), pages 316-342, October.
  9. Tobin, James, 1975. "Keynesian Models of Recession and Depression," American Economic Review, American Economic Association, vol. 65(2), pages 195-202, May.
  10. Chiarella,Carl & Flaschel,Peter, 2011. "The Dynamics of Keynesian Monetary Growth," Cambridge Books, Cambridge University Press, number 9780521180184.
  11. 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.
  12. Christian Groth, 1993. "Some unfamiliar dynamics of a familiar macro model a note," Journal of Economics, Springer, vol. 58(3), pages 293-305, October.
  13. Sargent, Thomas J & Wallace, Neil, 1973. "The Stability of Models of Money and Growth with Perfect Foresight," Econometrica, Econometric Society, vol. 41(6), pages 1043-48, November.
  14. 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.
  15. 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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Cited by:
  1. Pu Chen & Carl Chiarella & Peter Flaschel & Willi Semmler, 2006. "Keynesian Macrodynamics and the Phillips Curve. An Estimated Baseline Macromodel for the U.S. Economy," Working Paper Series 147, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  2. C. Chiarella & P. Chen, 2004. "Keynesian Dynamics and the Wage-Price Spiral:Estimating a Baseline Disequilibrium Approach," Computing in Economics and Finance 2004 149, Society for Computational Economics.

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