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Keynesian Disequilibrium Dynamics: Convergence, Roads to Instability and the Emergence of Complex Business Fluctuations

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Abstract

We reformulate the traditional AS-AD growth model of the Neoclassical Synthesis (stage I) with a Taylor policy rule replacing the conventional LM-curve, with gradually adjusting wages as well as prices, and with perfect foresight on current inflation rates and an adaptively revised notion of an inflationary climate in which the economy is operating. We compare this approach with the New Keynesian approach, the Neoclassical Synthesis, stage II, with staggered price and wage setting and find various common components, yet with radically different dynamic implications due to our treatment of the forward-looking part of our wage-price spiral. We show for a system estimate of our model that it implies qualitatively local asymptotic stability and when its estimated form is simulated in response to isolated shocks strongly damped business fluctuations, due to a stable interaction of goods market dynamics with the interest rate policy of the central bank and due to a normal working of a real-wage feedback chain. These results are however endangered – leading in fact to economic breakdown – when there is a global floor to money wage inflation rates. In this case, the return of some money wage flexibility in deep depressions is of help in restoring viability of the model, thereby even avoiding explosive dynamics and the collapse of the economy. This situation leads to viable, but complex business fluctuations.

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  • Pu Chen & Carl Chiarella & Peter Flaschel & Hing Hung, 2006. "Keynesian Disequilibrium Dynamics: Convergence, Roads to Instability and the Emergence of Complex Business Fluctuations," Working Paper Series 146, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  • Handle: RePEc:uts:wpaper:146
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    File URL: http://www.finance.uts.edu.au/research/wpapers/wp146.pdf
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    References listed on IDEAS

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    1. Pu Chen & Peter Flaschel, 2005. "Keynesian Dynamics and the Wage–Price Spiral: Identifying Downward Rigidities," Computational Economics, Springer;Society for Computational Economics, vol. 25(1), pages 115-142, February.
    2. 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.
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    Cited by:

    1. Asada, Toichiro & Chen, Pu & Chiarella, Carl & Flaschel, Peter, 2006. "Keynesian dynamics and the wage-price spiral: A baseline disequilibrium model," Journal of Macroeconomics, Elsevier, vol. 28(1), pages 90-130, March.
    2. Bernd Hayo & Britta Niehof, 2014. "Analysis of Monetary Policy Responses After Financial Market Crises in a Continuous Time New Keynesian Model," MAGKS Papers on Economics 201421, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    3. Pu Chen & Carl Chiarella & Peter Flaschel & Willi Semmler, 2006. "Keynesian Macrodynamics and the Phillips Curve. An Estimated Baseline Macromodel for the U.S. Economy," Working Paper Series 147, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    4. Ekkehard Ernst & Peter Flaschel & Christian Proano & Willi Semmler, 2006. "Disequilibrium Macroeconomic Dynamics, Income Distribution and Wage-Price Phillips Curves," IMK Working Paper 04-2006, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    5. Bernd Hayo & Britta Niehof, 2013. "Studying International Spillovers in a New Keynesian Continuous Time Framework with Financial Markets," MAGKS Papers on Economics 201342, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

    More about this item

    Keywords

    DAS-DAD dynamics; wage and price Phillips curves; real interest effects; real wage effects; (in)stability; persistent business cycles; complex dynamics;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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