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Keynesian Dynamics and the Wage Price Spiral. A Baseline Disequilibrium Approach

Author

Listed:
  • Toichiro Asada

    (Faculty of Economics, Chuo University)

  • Pu Chen

    (Faculty of Economics, Bielefeld University)

  • Carl Chiarella

    (School of Finance & Economics, University of Technology, Sydney)

  • Peter Flaschel

    (Faculty of Economics, Bielefeld University)

Abstract

We reformulate and extend the standard AS-AD growth model of the Neoclassical Synthesis (Stage I) with its traditional microfoundations. The model still has an LM curve in the place of a Taylor interest rate rule, exhibits sticky wages as well as sticky prices, myopic perfect foresight of current inflation rates and adaptively formed medium run expectations concerning the investment and inflation climate in which the economy is operating. The resulting nonlinear 5D model of labor and goods market disequilibrium dynamics avoids striking anomalies of the standard model of the Neoclassical synthesis (Stage I). It exhibits instead Keynesian feedback dynamics proper with in particular asymptotic stability of its unique interior steady state for low adjustment speeds and with cyclical loss of stability – by way of Hopf bifurcations – when some adjustment speeds are made suficiently large, even leading to purely explosive dynamics sooner or later. In such cases downward money wage rigidity can be used to make the dynamics bounded and thus viable. In this way we obtain and analyze a baseline DAS-AD model with Keynesian feedback channels whose rich set of stability features is the source of business cycle fluctuations. These outcomes of the model stand in contrast to those of the currently fashionable New Keynesian alternative (the Neoclassical Synthesis, Stage II) that we suggest is more limited in scope.

Suggested Citation

  • Toichiro Asada & Pu Chen & Carl Chiarella & Peter Flaschel, 2004. "Keynesian Dynamics and the Wage Price Spiral. A Baseline Disequilibrium Approach," Macroeconomics 0409001, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpma:0409001
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    References listed on IDEAS

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    1. Tobin, James, 1975. "Keynesian Models of Recession and Depression," American Economic Review, American Economic Association, vol. 65(2), pages 195-202, May.
    2. Chiarella,Carl & Flaschel,Peter, 2011. "The Dynamics of Keynesian Monetary Growth," Cambridge Books, Cambridge University Press, number 9780521180184, October.
    3. Mankiw, N Gregory, 2001. "The Inexorable and Mysterious Tradeoff between Inflation and Unemployment," Economic Journal, Royal Economic Society, vol. 111(471), pages 45-61, May.
    4. W. Semmler & P. Chen & C. Chiarella, 2005. "Keynesian Dynamics and the Wage-Price Spiral:Estimating and Analyzing a Baseline Disequilibrium Approach," Computing in Economics and Finance 2005 211, Society for Computational Economics.
    5. Glenn Rudebusch & Lars E.O. Svensson, 1999. "Policy Rules for Inflation Targeting," NBER Chapters,in: Monetary Policy Rules, pages 203-262 National Bureau of Economic Research, Inc.
    6. Sargent, Thomas J & Wallace, Neil, 1973. "The Stability of Models of Money and Growth with Perfect Foresight," Econometrica, Econometric Society, vol. 41(6), pages 1043-1048, November.
    7. 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.
    8. Carl Chiarella & Peter Flaschel & Reiner Franke & Willi Semmler, 2002. "Stability Analysis of a High-Dimensional Macrodynamic Model of Real-Financial Interaction: A Cascade of Matrices Approach," Working Paper Series 123, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    9. 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. Velupillai, K. Vela, 2006. "A disequilibrium macrodynamic model of fluctuations," Journal of Macroeconomics, Elsevier, vol. 28(4), pages 752-767, December.
    2. 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.
    3. C. Chiarella & P. Chen, 2004. "Keynesian Dynamics and the Wage-Price Spiral:Estimating a Baseline Disequilibrium Approach," Computing in Economics and Finance 2004 149, Society for Computational Economics.

    More about this item

    Keywords

    DAS-AD growth; wage and price Phillips curves; real interest effects; real wage effects; (in)stability; persistent business cycles; inflation and deflation;

    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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