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The Stability of Full Employment. A Reconstruction of Chapter 19-Keynesianism

  • Hansjoerg Klausinger

    ()

    (Department of Economics, Vienna University of Economics & B.A.)

In the vein of chapter 19 of Keynes's "General Theory" the following study investigates the dynamic properties of the traditional Keynesian model of the neoclassical synthesis. The dynamics (stability vs. instability, monotonic vs. oscillatory adjustment) is examined - in the absence of active stabilisation policy, that is assuming, in particular, monetary policy to follow Friedman's constant money growth-rule - by appending a wage Phillips curve (with inflationary expectations) and adaptive expectations (with rational expectations as a limiting case) to the static model. Furthermore two regimes are distinguished: on the one hand the "flexible- interest-rate-regime" where the nominal interest rate is free to move and on the other hand the "zero-interest- rate-regime" (similar to the Keynesian "liquidity trap") where the non-negativity restriction on the nominal interest rate becomes binding. Some of the conclusions are (i) that although possibly stable within the flexible- interest-regime the system as a whole might exhibit corridor stability", (ii) that wage flexibility can be (and that the inclusion of inflationary expectations into the Phillips curve certainly is) destabilising, and (iii) that increasing the rate of steady-state inflation makes it "more probable" that full-employment equilibrium isstable.

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Paper provided by Vienna University of Economics and Business, Department of Economics in its series Department of Economics Working Papers with number wuwp063.

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Date of creation: Apr 1999
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Handle: RePEc:wiw:wiwwuw:wuwp063
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  1. Dimand, R.W., 1994. "Irving Fisher, J.M. Keynes and the Transition to Modern Macroeconomics," Working Papers 1994-19, Brock University, Department of Economics.
  2. Tobin, James, 1975. "Keynesian Models of Recession and Depression," American Economic Review, American Economic Association, vol. 65(2), pages 195-202, May.
  3. Bennett T. McCallum, 1986. "On "Real" and "Sticky-Price" Theories of the Business Cycle," NBER Working Papers 1933, National Bureau of Economic Research, Inc.
  4. Collard, David, 1996. "Pigou and Modern Business Cycle Theory," Economic Journal, Royal Economic Society, vol. 106(437), pages 912-24, July.
  5. Howitt, Peter W, 1978. " The Limits to Stability of a Full-employment Equilibrium," Scandinavian Journal of Economics, Wiley Blackwell, vol. 80(3), pages 265-82.
  6. Collard, David A, 1983. "Pigou on Expectations and the Cycle," Economic Journal, Royal Economic Society, vol. 93(37), pages 411-14, June.
  7. Lofgren, Karl-Gustaf, 1979. " The Corridor and Local Stability of the Effective Excess Demand Hypothesis: A Result," Scandinavian Journal of Economics, Wiley Blackwell, vol. 81(1), pages 30-47.
  8. J. Bradford De Long & Lawrence H. Summers, 1985. "Is Increased Price Flexibility Stabilizing?," NBER Working Papers 1686, National Bureau of Economic Research, Inc.
  9. Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, University of Chicago Press, vol. 71, pages 280.
  10. James Tobin, 1991. "Price Flexibility and Output Stability: An Old Keynesian View," Cowles Foundation Discussion Papers 994R, Cowles Foundation for Research in Economics, Yale University, revised Sep 1991.
  11. Hansjorg Klausinger, 1999. "German Anticipations of the Keynesian Revolution?: The Case of Lautenbach, Neisser and Ropke," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 6(3), pages 378-403.
  12. Peter Temin, 1991. "Lessons from the Great Depression," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262700441, June.
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