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Keynesian Macrodynamics and the Phillips Curve. An Estimated Baseline Macromodel for the U.S. Economy

  • Pu Chen

    (Faculty of Economics, University of Bielefeld)

  • Carl Chiarella

    ()

    (Finance Discipline Group, University of Technology, Sydney)

  • Peter Flaschel

    (Faculty of Economics, University of Bielefeld)

  • Willi Semmler

    (Bernhard Schwartz Center for Economic Policy Analysis, New School University and Center for Empirical Macroeconomics, University of Bielefeld, Bielefeld,)

In this paper we formulate a baseline disequilibrium AS-AD model and empirically estimate it with time series data for the US-economy. The version of the model used here exhibits a Phillips-curve, a dynamic IS curve and a Taylor interest rate rule. It is based on sticky wages and prices, perfect foresight of current inflation rates and adaptive expectations concerning the inflation climate in which the economy operates. A version of Okun's law is used to link capacity utilization to employment. Our proposed nonlinear 5D model of real market dynamics overcomes anomalies of the old Neoclassical synthesis and also the rational expectations methodology of the new Neoclassical Synthesis. It resembles New Keynesian macroeconomics but permits nonclearing of markets. It exhibits typical Keynesian feedback structures with asymptotic stability of its steady state for low adjustment speeds and with loss of stability { generally by way of Hopf bifurcations { when certain adjustment speeds are made sufficiently large. We provide system estimates of our model, for quarterly time series data of the U.S. economy 1965.1-2001.1, and study the stability features of the U.S. economy with respect to its various feedback channels from an empirical perspective. Based on these estimates, which in particular imply that goods market dynamics are profit led, we find that the dynamics are strongly convergent around the steady state, if monetary policy is sufficiently active, but will lose this feature if the inflationary climate variable or the price inflation rate itself adjusts sufficiently fast. We also study to what extent more active interest rate feedback rules or downward wage rigidity can stabilize the dynamics in the large when the steady state is locally repelling. We study the economy's behavior due to faster adjustments. We find that monetary policy should allow for sufficient steady state inflation in order to avoid stability problems in areas of the phase space where wages are not flexible in a downward direction.

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File URL: http://www.finance.uts.edu.au/research/wpapers/wp147.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 147.

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Length: 57
Date of creation: 01 Mar 2006
Date of revision:
Publication status: Published as: Chen, P., Chiarella, C., Flaschel, P. and Semmler, W., 2006, "Keynesian Macrodynamics and the Phillips Curve. An Estimated Baseline Macro-Model for the U.S. Economy", in Chiarella, C., Flaschel, P., Franke, R. and Semmler, W. (eds): Quantitative and Empirical Analysis of Nonlinear Dynamic Macromodels, Contributions to Economic Analysis (Series editors: B. Baltagi, E. Sadka and D. Wildasin), Elsevier, Amsterdam.
Handle: RePEc:uts:wpaper:147
Contact details of provider: Postal: PO Box 123, Broadway, NSW 2007, Australia
Phone: +61 2 9514 7777
Fax: +61 2 9514 7711
Web page: http://www.uts.edu.au/about/uts-business-school/finance

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  1. Jeffrey C. Fuhrer & Glenn D. Rudebusch, 2002. "Estimating the Euler equation for output," Working Papers 02-3, Federal Reserve Bank of Boston.
  2. repec:cup:cbooks:9780521850254 is not listed on IDEAS
  3. Hans-Martin Krolzig & Peter Flaschel, 2003. "Wage and Price Phillips Curves An empirical analysis of destabilizing wage-price spirals," Economics Series Working Papers 2003-W16, University of Oxford, Department of Economics.
  4. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
  5. T. Asada & P. Chen, 2004. "Keynesian Dynamics and the wage price spiral. A baseline disequilibrium approach," Computing in Economics and Finance 2004 262, Society for Computational Economics.
  6. Mankiw, N Gregory, 2001. "The Inexorable and Mysterious Tradeoff between Inflation and Unemployment," Economic Journal, Royal Economic Society, vol. 111(471), pages C45-61, May.
  7. 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.
  8. Rudebusch, Glenn D & Svensson, Lars E O, 1998. "Policy Rules for Inflation Targeting," CEPR Discussion Papers 1999, C.E.P.R. Discussion Papers.
  9. Lawrence F. Katz & Olivier Blanchard, 1999. "Wage Dynamics: Reconciling Theory and Evidence," American Economic Review, American Economic Association, vol. 89(2), pages 69-74, May.
  10. 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.
  11. Christian Groth, 1993. "Some unfamiliar dynamics of a familiar macro model a note," Journal of Economics, Springer, vol. 58(3), pages 293-305, October.
  12. Robert J. Barro, 1994. "The Aggregate-Supply/Aggregate-Demand Model," Eastern Economic Journal, Eastern Economic Association, vol. 20(1), pages 1-6, Winter.
  13. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, March.
  14. repec:cup:cbooks:9780521643511 is not listed on IDEAS
  15. Peter Flaschel & Göran Kauermann & Willi Semmler, 2007. "Testing Wage And Price Phillips Curves For The United States," Metroeconomica, Wiley Blackwell, vol. 58(4), pages 550-581, November.
  16. 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.
  17. Laxton, Douglas & Rose, David & Tambakis, Demosthenes, 1999. "The U.S. Phillips curve: The case for asymmetry," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1459-1485, September.
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