Keynesian AD-AS, Quo Vadis?
We formulate a dynamic AD-AS model based on gradually adjusting wages and prices, perfect foresight of current inflation rates and adaptive expectations concerning the inflation climate in which the economy operates. The model consists of a wage and a price Phillips curve, a dynamic IS curve as well as a dynamic employment adjustment equation (Okun’s law) and a Taylor interest rate rule. The model can be reduced to a 3D dynamical system by a suitable choice of the Taylor rule and implies strong stability results, in particular for an appropriately chosen interest rate policy rule. Through instrumental variables GMM system estimation with aggregate time series data for the U.K. economy, we obtain parameter estimates which support the specification of our theoretical model and its stability implications. We contrast these results with the standard (formally similarly structured) New Keynesian model with staggered wage and price setting where determinacy of the dynamics represents a severe problem and where (if determinacy can be achieved) inertia-free stability is obtained by the very choice of the solution method.
|Date of creation:||01 Nov 2007|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +61 2 9514 7777
Fax: +61 2 9514 7711
Web page: http://www.uts.edu.au/about/uts-business-school/finance
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jordi Galí & Mark Gertler, 1998.
"Inflation dynamics: A structural econometric analysis,"
Economics Working Papers
341, Department of Economics and Business, Universitat Pompeu Fabra.
- Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
- Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
- Galí, Jordi & Gertler, Mark & López-Salido, J David, 2001.
"European Inflation Dynamics,"
CEPR Discussion Papers
2684, C.E.P.R. Discussion Papers.
- 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.
- Svensson, Lars E.O., 1998.
"Inflation Targeting as a Monetary Policy Rule,"
646, Stockholm University, Institute for International Economic Studies.
- Svensson, L.E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Papers 646, Stockholm - International Economic Studies.
- Svensson, Lars E. O., 1998. "Inflation targeting as a monetary policy rule," CFS Working Paper Series 1998/16, Center for Financial Studies (CFS).
- Svensson, Lars E O, 1998. "Inflation Targeting as a Monetary Policy Rule," CEPR Discussion Papers 1998, C.E.P.R. Discussion Papers.
- Lars E.O. Svensson, 1998. "Inflation Targeting as a Monetary Policy Rule," NBER Working Papers 6790, National Bureau of Economic Research, Inc.
- 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.
- Chen Pu & Flaschel Peter, 2006. "Measuring the Interaction of Wage and Price Phillips Curves for the U.S. Economy," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 10(4), pages 1-35, December.
- Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
- Krolzig, Hans-Martin & Peter Flaschel, 2003. "Wage and Price Phillips Curves," Royal Economic Society Annual Conference 2003 128, Royal Economic Society.
- Robert J. Barro, 1994. "The Aggregate-Supply/Aggregate-Demand Model," Eastern Economic Journal, Eastern Economic Association, vol. 20(1), pages 1-6, Winter.
- 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.
- Blanchard, Olivier J, 1981. "Output, the Stock Market, and Interest Rates," American Economic Review, American Economic Association, vol. 71(1), pages 132-43, March.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:uts:wpaper:151. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Duncan Ford)
If references are entirely missing, you can add them using this form.