IDEAS home Printed from https://ideas.repec.org/p/new/wpaper/1701.html
   My bibliography  Save this paper

A Keynesian Dynamic Stochastic Disequilibrium model for business cycle analysis

Author

Listed:
  • Christian Schoder

    (Department of Economics, New School for Social Research)

Abstract

A Dynamic Stochastic Disequilibrium (DSDE) model is proposed for business cycle analysis. Unemployment arises from job rationing due to insufficient aggregate spending. The nominal wage is taken as a policy variable subject to a collective Nash bargaining process between workers and firms with the state of the labor market affecting the relative bargaining power. A precautionary saving motive arising from an uninsurable risk of permanent income loss implies an equilibrium relation between consumption, income and wealth. The DSDE model differs from the corresponding Dynamic Stochastic General Equilibrium (DSGE) model with labor market clearing in important respects: (i) Output is determined from the demand side and not from the supply side; (ii) The steady-state interest rate cannot be interpreted as a natural rate; (iii) It has to be smaller than the rate of economic growth in order for a steady state to exist; (iv) Determinacy of the solution requires the monetary policy response to in ation to be high (low) at low (high) steady-state interest rates; (v) Fighting in ation is stabilizing in the active monetary policy regime but destabilizing in the passive monetary policy regime; (vi) Macroeconomic responses to monetary policy and productivity shocks are similar to those of the DSGE model but give more weight to quantity adjustment and predict the real wage to increase with productivity.

Suggested Citation

  • Christian Schoder, 2017. "A Keynesian Dynamic Stochastic Disequilibrium model for business cycle analysis," Working Papers 1701, New School for Social Research, Department of Economics.
    • Handle: RePEc:new:wpaper:1701
    as

    Download full text from publisher

    File URL: http://www.economicpolicyresearch.org/econ/2017/NSSR_WP_012017.pdf
    File Function: First version, 2017
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
    2. Benveniste, L M & Scheinkman, J A, 1979. "On the Differentiability of the Value Function in Dynamic Models of Economics," Econometrica, Econometric Society, vol. 47(3), pages 727-732, May.
    3. Olivier Blanchard & Jordi Galí, 2010. "Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 1-30, April.
    4. Heng-fu Zou, 1998. "The spirit of capitalism, social status, money, and accumulation," Journal of Economics, Springer, vol. 68(3), pages 219-233, October.
    5. Mark Gertler & Luca Sala & Antonella Trigari, 2008. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1713-1764, December.
    6. N. Gregory Mankiw & Matthew Weinzierl, 2011. "An Exploration of Optimal Stabilization Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 209-272.
    7. Galí, Jordi, 2010. "Monetary Policy and Unemployment," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 10, pages 487-546, Elsevier.
    8. Bakshi, Gurdip S & Chen, Zhiwu, 1996. "Inflation, Asset Prices, and the Term Structure of Interest Rates in Monetary Economies," The Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 241-275.
    9. Ricardo J Caballero & Emmanuel Farhi, 2018. "The Safety Trap," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(1), pages 223-274.
    10. Carroll, Christopher D. & Jeanne, Olivier, 2009. "A tractable model of precautionary reserves, net foreign assets, or sovereign wealth funds," CFS Working Paper Series 2009/15, Center for Financial Studies (CFS).
    11. Christopher D. Carroll & Patrick Toche, 2009. "A Tractable Model of Buffer Stock Saving," NBER Working Papers 15265, National Bureau of Economic Research, Inc.
    12. Pascal Michaillat, 2012. "Do Matching Frictions Explain Unemployment? Not in Bad Times," American Economic Review, American Economic Association, vol. 102(4), pages 1721-1750, June.
    13. Christopher D. Carroll, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 1-55.
    14. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    15. Mark Gertler & Antonella Trigari, 2009. "Unemployment Fluctuations with Staggered Nash Wage Bargaining," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 38-86, February.
    16. Olivier Blanchard, 2016. "Do DSGE Models Have a Future?," Policy Briefs PB16-11, Peterson Institute for International Economics.
    17. Pascal Michaillat & Emmanuel Saez, 2022. "An economical business-cycle model [Breaking through the zero lower bound]," Oxford Economic Papers, Oxford University Press, vol. 74(2), pages 382-411.
    18. Roger E. A. Farmer, 2008. "Aggregate demand and supply," International Journal of Economic Theory, The International Society for Economic Theory, vol. 4(1), pages 77-93, March.
    19. Benassy, Jean-Pascal, 1993. "Nonclearing Markets: Microeconomic Concepts and Macroeconomic Applications," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 732-761, June.
    20. Anton Korinek & Alp Simsek, 2016. "Liquidity Trap and Excessive Leverage," American Economic Review, American Economic Association, vol. 106(3), pages 699-738, March.
    21. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March.
    22. Atif Mian & Amir Sufi, 2014. "What Explains the 2007–2009 Drop in Employment?," Econometrica, Econometric Society, vol. 82, pages 2197-2223, November.
    23. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
    24. Heng-fu Zou, 1995. "The spirit of capitalism and savings behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 28(1), pages 131-143, September.
    25. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
    26. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Christian Schoder, 2017. "An estimated Dynamic Stochastic Disequilibrium model of Euro-Area unemployment," Working Papers 1725, New School for Social Research, Department of Economics.
    2. Schoder, Christian, 2017. "Are Dynamic Stochastic Disequilibrium models Keynesian or neoclassical?," Structural Change and Economic Dynamics, Elsevier, vol. 40(C), pages 46-63.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Schoder, Christian, 2020. "A Keynesian Dynamic Stochastic Disequilibrium model for business cycle analysis," Economic Modelling, Elsevier, vol. 86(C), pages 117-132.
    2. Christian Schoder, 2017. "An estimated Dynamic Stochastic Disequilibrium model of Euro-Area unemployment," Working Papers 1725, New School for Social Research, Department of Economics.
    3. Pascal Michaillat & Emmanuel Saez, 2015. "Aggregate Demand, Idle Time, and Unemployment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(2), pages 507-569.
    4. Moon, Weh-Sol, 2011. "Business cycle with nominal contracts and search frictions," MPRA Paper 31716, University Library of Munich, Germany.
    5. Petrosky-Nadeau, Nicolas & Wasmer, Etienne, 2015. "Macroeconomic dynamics in a model of goods, labor, and credit market frictions," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 97-113.
    6. Moon, Weh-Sol, 2018. "The Business Cycle With Nominal Contracts And Search Frictions," Macroeconomic Dynamics, Cambridge University Press, vol. 22(2), pages 307-330, March.
    7. Pascal Michaillat, 2012. "Do Matching Frictions Explain Unemployment? Not in Bad Times," American Economic Review, American Economic Association, vol. 102(4), pages 1721-1750, June.
    8. F. Di Pace & K. Mitra & S. Zhang, 2021. "Adaptive Learning and Labor Market Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(2-3), pages 441-475, March.
    9. Schoder, Christian, 2017. "Are Dynamic Stochastic Disequilibrium models Keynesian or neoclassical?," Structural Change and Economic Dynamics, Elsevier, vol. 40(C), pages 46-63.
    10. Engin Kara & Yongmin Park, 2017. "Heterogeneity in Staggered Wage Bargaining and Unemployment Volatility Puzzle," CESifo Working Paper Series 6536, CESifo.
    11. Lechthaler, Wolfgang & Merkl, Christian & Snower, Dennis J., 2010. "Monetary persistence and the labor market: A new perspective," Journal of Economic Dynamics and Control, Elsevier, vol. 34(5), pages 968-983, May.
    12. Rendahl, Pontus, 2014. "Fiscal Policy in an Unemployment Crisis," CEPR Discussion Papers 9992, C.E.P.R. Discussion Papers.
    13. Stéphane Dupraz & Emi Nakamura & Jón Steinsson, 2019. "A Plucking Model of Business Cycles," NBER Working Papers 26351, National Bureau of Economic Research, Inc.
    14. Andrei Polbin & Sergey Drobyshevsky, 2014. "Developing a Dynamic Stochastic Model of General Equilibrium for the Russian Economy," Research Paper Series, Gaidar Institute for Economic Policy, issue 166P, pages 156-156.
    15. repec:hal:spmain:info:hdl:2441/293qice3lj861rvos9ns14n0h0 is not listed on IDEAS
    16. Christiano, Lawrence J. & Trabandt, Mathias & Walentin, Karl, 2011. "Introducing financial frictions and unemployment into a small open economy model," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 1999-2041.
    17. Hashimoto, Ken-ichi & Ono, Yoshiyasu & Schlegl, Matthias, 2023. "Structural unemployment, underemployment, and secular stagnation," Journal of Economic Theory, Elsevier, vol. 209(C).
    18. Di Pace, Federico & Villa, Stefania, 2016. "Factor complementarity and labour market dynamics," European Economic Review, Elsevier, vol. 82(C), pages 70-112.
    19. Gregory De Walque & Olivier Pierrard & Henri Sneessens & Raf Wouters, 2009. "Sequential Bargaining in a Neo-Keynesian Model with Frictional Unemployment and Staggered Wage Negotiations," Annals of Economics and Statistics, GENES, issue 95-96, pages 223-250.
    20. Di Pace, F. & Faccini, R., 2012. "Deep habits and the cyclical behaviour of equilibrium unemployment and vacancies," Journal of Economic Dynamics and Control, Elsevier, vol. 36(2), pages 183-200.
    21. Michaillat, Pascal, 2011. "Fiscal Multipliers Over the Business Cycle," CEPR Discussion Papers 8610, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Dynamic stochastic disequilibrium; labor market disequilibrium; labor rationing; collective wage bargaining; monetary policy;
    All these keywords.

    JEL classification:

    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:new:wpaper:1701. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Mark Setterfield (email available below). General contact details of provider: https://edirc.repec.org/data/denewus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.