Wage – price dynamics and financial market in a disequilibrium macro model: A Keynes – Kaldor – Minsky modeling of recession and inflation using VECM

This paper studies wage-price dynamics in the context of a disequilibrium macro model where there are two Phillips curves (PC's), a wage PC and price PC. We adapt this framework but introduce a Kaldorian delay effect in wage dynamics whereby output and sales predate wage dynamics. Along Keynesian lines aggregate demand drives output, but output is also impacted from the supply side, through Minsky - Kindleberger financial conditions, enhancing inflation through bottlenecks and supply constraints. Worsening financial conditions, resulting from central banks raising interest rates to counteract inflation, may actually accelerate the inflation rate through affecting the supply side. This occurs when there are financially generated bottlenecks and external non-stationary variables, such as fossil energy and food costs, acting as exogenous drivers of the inflation rate. These features are first studied in a disequilibrium intertemporal dynamic macroeconomic model but then empirically explored in a mixed Vector Error Correction Model (VECM) with a mix of stationary and non-stationary variables. Nonlinearities in the dynamics and regime switching are shown to be essential in disequilibrium macrodynamics, here first studied analytically and then econometrically, exploring the transitory and persistent effects of shocks.