A Note on the Stability of Full Employment
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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Volume (Year): 14 (2002)
Issue (Month): 2 ()
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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"Is Increased Price Flexibility Stabilizing?,"
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994R, Cowles Foundation for Research in Economics, Yale University, revised Sep 1991.
- James Tobin, 1993. "Price Flexibility and Output Stability: An Old Keynesian View," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 45-65, Winter.
- Christian Groth, 1993. "Some unfamiliar dynamics of a familiar macro model a note," Journal of Economics, Springer, vol. 58(3), pages 293-305, October.
- 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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