Interacting Two-Country Business Fluctuations
In this paper we investigate the closed-economy Keynes-Wicksell-Goodwin model of Chiarella and Flaschel (2000) for the case of two interacting open economies. We introduce these coupled two-country KWG dynamics on the extensive form level by means of a subdivision into nine modules describing the behavioral equations, the laws of motion and the identities or budget equations of the model. We then derive their intensive form representation and the 10 laws of motion of the model on the basis of certain simplifying assumptions. Thereafter we present the uniquely determined steady state solution of the dynamics and discuss in a mathematically informal way its stability properties, concerning asymptotic stability and loss of stability by way of super- or subcritical Hopf-bifurcations. In a final section we explore numerically a variety of situations of interacting real and financial cycles, where the steady state is locally repelling, but where the overall dynamics are bounded in an economically meaningful domain by means of a kinked money wage Phillips curve, exhibiting downward rigidity of the money-wage, coupled with upward flexibility of the usual type.
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- Carl Chiarella, 1991. "Monetary and Fiscal Policy Under Nonlinear Exchange Rate Dynamics," Working Paper Series 6, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
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- Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
- 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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