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

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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File URL: http://www.finance.uts.edu.au/research/wpapers/wp120.pdf
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Paper provided by Finance Discipline Group, UTS Business School, University of Technology, Sydney in its series Working Paper Series with number 120.

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Date of creation: 01 Oct 2002
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Publication status: Published as: Chiarella, C., Flaschel, P., Gong, G. and Semmler, E., 2003, "Nonlinear Phillips Curves, Complex Dynamics and Monetary Policy in a Keynesian Macro Model", Chaos, Solitons & Fractals, 18(3), 613-634.
Handle: RePEc:uts:wpaper:120
Contact details of provider: Postal: PO Box 123, Broadway, NSW 2007, Australia
Phone: +61 2 9514 7777
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Web page: http://www.uts.edu.au/about/uts-business-school/finance

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  1. Chiarella,Carl & Flaschel,Peter, 2000. "The Dynamics of Keynesian Monetary Growth," Cambridge Books, Cambridge University Press, number 9780521643511.
  2. 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.
  3. Franke, Reiner, 1996. "A Metzlerian model of inventory growth cycles," Structural Change and Economic Dynamics, Elsevier, vol. 7(2), pages 243-262, June.
  4. Jordi Galí, 2000. "The return of the Phillips curve and other recent developments in business cycle theory," Spanish Economic Review, Springer, vol. 2(1), pages 1-10.
  5. Benhabib, J. & Schmitt-Grohe, S. & Uribe, M., 1998. "Monetary Policy and Multiple Equilibria," Working Papers 98-02, C.V. Starr Center for Applied Economics, New York University.
  6. 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.
  7. 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.
  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 355-63.
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