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Nonlinear Phillips Curves, Complex Dynamics and Monetary Policy in a Keynesian Macro Model

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In the framework of a Keynesian monetary macro model we study implications of kinked Phillips curves and alternative monetary policy rules. As alternative monetary policy rules we consider monetary growth targeting and interest rate targeting (the Taylor rule). Our monetary macro model exhibits: asset market clearing, disequilibrium in product and labor markets, sluggish price and quantity adjustments, two Phillips-Curves for wage and price dynamics, and a combination of medium-run adaptive and short-run forward looking expectations. Simulations of the model with our estimated parameters reveal global instability of its steady state. We show that monetary policy can stabilize the dynamics to some extent and that, in addition, an institutionally given kink in the money wage Phillips-Curve (downwardly rigid wages) represents a powerful mechanism for getting bounded, more or less irregular fluctuations in the place of purely explosive ones. The resulting fluctuations can be reduced in their size by choosing the parameters of monetary policy within a certain corridor, the exact position of which may however be very uncertain.

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  • Carl Chiarella & Peter Flaschel & Gang Gong & Willi Semmler, 2002. "Nonlinear Phillips Curves, Complex Dynamics and Monetary Policy in a Keynesian Macro Model," Working Paper Series 120, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  • Handle: RePEc:uts:wpaper:120
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    File URL: http://www.finance.uts.edu.au/research/wpapers/wp120.pdf
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    1. Stephanie Schmitt-Grohe & Jess Benhabib & Martin Uribe, 2001. "Monetary Policy and Multiple Equilibria," American Economic Review, American Economic Association, vol. 91(1), pages 167-186, March.
    2. Chiarella,Carl & Flaschel,Peter, 2011. "The Dynamics of Keynesian Monetary Growth," Cambridge Books, Cambridge University Press, number 9780521180184, May.
    3. Victoria C. Hoogenveen & Simon K. Kuipers, 2000. "The long-run effects of low inflation rates," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 53(214), pages 267-285.
    4. Franke, Reiner, 1996. "A Metzlerian model of inventory growth cycles," Structural Change and Economic Dynamics, Elsevier, vol. 7(2), pages 243-262, June.
    5. Flaschel, Peter & Gong, Gang & Semmler, Willi, 2001. "A Keynesian macroeconometric framework for the analysis of monetary policy rules," Journal of Economic Behavior & Organization, Elsevier, vol. 46(1), pages 101-136, September.
    6. Gang Gong & Willi Semmler & Peter Flaschel, 1999. "A Macroeconometric Study on the Labor Market and Monetary Policy: Germany and the EMU," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 1999-01, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    7. H. Rose, 1967. "On the Non-Linear Theory of the Employment Cycle," Review of Economic Studies, Oxford University Press, vol. 34(2), pages 153-173.
    8. Franke, Reiner & Lux, Thomas, 1993. " Adaptive Expectations and Perfect Foresight in a Nonlinear Metzlerian Model of the Inventory Cycle," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(3), pages 355-363.
    9. Jordi Galí, 2000. "The return of the Phillips curve and other recent developments in business cycle theory," Spanish Economic Review, Springer;Spanish Economic Association, vol. 2(1), pages 1-10.
    10. Victoria C. Hoogenveen & Simon K. Kuipers, 2000. "The long-run effects of low inflation rates," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 53(214), pages 267-285.
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    Citations

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    Cited by:

    1. Jian Gao & Gang Gong & Xue-Zhong He, 2007. "Monetary Policy and Exchange Rate Regime: Proposal for a Small and Less Developed Economy," Research Paper Series 199, Quantitative Finance Research Centre, University of Technology, Sydney.
    2. Carl Chiarella & Peter Flaschel & Peiyuan Zhu, 2003. "The Structure of Keynesian Macrodynamics: A Framework for Future Research," Working Paper Series 129, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    3. Toichiro Asada & Carl Chiarella & Peter Flaschel, 2003. "Keynes-Metzler-Goodwin Model Building: The Closed Economy," Working Paper Series 124, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    4. Gang Gong & Jian Gao, 2008. "Monetary policy under fixed exchange regime: A study on the future monetary policy in China," Psychometrika, Springer;The Psychometric Society, vol. 3(2), pages 169-208, June.
    5. Matthieu Charpe & Peter Flaschel, 2011. "Worker debt, default ans diversity of financial fragility," IMK Working Paper 5-2011, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    6. Hallegatte, Stéphane & Ghil, Michael & Dumas, Patrice & Hourcade, Jean-Charles, 2008. "Business cycles, bifurcations and chaos in a neo-classical model with investment dynamics," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 57-77, July.
    7. Charpe, Matthieu & Flaschel, Peter, 2013. "Workers’ debt, default and the diversity of financial fragilities," Structural Change and Economic Dynamics, Elsevier, vol. 27(C), pages 48-65.
    8. Stéphane Hallegatte & Michael Ghil, 2007. "Endogenous Business Cycles and the Economic Response to Exogenous Shocks," Working Papers 2007.20, Fondazione Eni Enrico Mattei.
    9. Gang Gong & Jian Gao, 2006. "The Independent Monetary Policy under the Fixed Exchange Regime," Computing in Economics and Finance 2006 517, Society for Computational Economics.
    10. de Sá, Rodrigo & Portugal, Marcelo S., 2015. "Central bank and asymmetric preferences: An application of sieve estimators to the U.S. and Brazil," Economic Modelling, Elsevier, vol. 51(C), pages 72-83.
    11. Stéphane Hallegatte, 2005. "Interactions d'échelles en économie : Application à l'évaluation intégré des dommages du changement climatique et des événements extrêmes," CIRED Working Papers halshs-00008712, HAL.

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