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A Note on the Stability of Full Employment

  • Hansjorg Klausinger

This note investigates the stability properties of the Keynesian macro-model under the assumption of slow adjustment of nominal wages and expectations of inflation. First, the stability conditions of the 'flexible-interest-rate regime' are related to those derived by Cagan (1956) and Tobin (1975), emphasising the potentially destabilising effect of wage flexibility. Then, taking the restriction of a zero floor to the nominal interest rate into account it is shown that the model exhibits 'corridor stability'. From this follows the conjecture that increasing the rate of steady-state inflation makes it 'more probable' that the system returns to full-employment after a shock of given size.

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Article provided by Taylor & Francis Journals in its journal Review of Political Economy.

Volume (Year): 14 (2002)
Issue (Month): 2 ()
Pages: 211-225

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Handle: RePEc:taf:revpoe:v:14:y:2002:i:2:p:211-225
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  1. Tobin, James, 1975. "Keynesian Models of Recession and Depression," American Economic Review, American Economic Association, vol. 65(2), pages 195-202, May.
  2. James Tobin, 1991. "Price Flexibility and Output Stability: An Old Keynesian View," Cowles Foundation Discussion Papers 994R, Cowles Foundation for Research in Economics, Yale University, revised Sep 1991.
  3. J. Bradford De Long & Lawrence H. Summers, 1985. "Is Increased Price Flexibility Stabilizing?," NBER Working Papers 1686, National Bureau of Economic Research, Inc.
  4. Christian Groth, 1993. "Some unfamiliar dynamics of a familiar macro model a note," Journal of Economics, Springer, vol. 58(3), pages 293-305, October.
  5. Peter Flaschel & Reiner Franke, 2000. "An Old-Keynesian Note on Destabilizing Price Flexibility," Review of Political Economy, Taylor & Francis Journals, vol. 12(3), pages 273-283.
  6. Howitt, Peter W, 1978. " The Limits to Stability of a Full-employment Equilibrium," Scandinavian Journal of Economics, Wiley Blackwell, vol. 80(3), pages 265-82.
  7. Paul R. Krugman, 1998. "It's Baaack: Japan's Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 137-206.
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