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

  • 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)

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.

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File URL: http://econwpa.repec.org/eps/mac/papers/0409/0409001.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0409001.

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Length: 41 pages
Date of creation: 01 Sep 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0409001
Note: Type of Document - pdf; pages: 41
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Christian Groth, 1993. "Some unfamiliar dynamics of a familiar macro model a note," Journal of Economics, Springer, vol. 58(3), pages 293-305, October.
  2. Patrick W. Schmitz, 2006. "Book Review," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(3), pages 535-542, September.
    • R. Luce & M. Raith & E. Rasmusen & S. Grosskopf & K. Velupillai & W. Pauwels & E. Furubotn & P. Schmitz & S. Napel, 2000. "Book reviews," Journal of Economics, Springer, vol. 71(3), pages 316-342, October.
  3. 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.
  4. Sargent, Thomas J & Wallace, Neil, 1973. "The Stability of Models of Money and Growth with Perfect Foresight," Econometrica, Econometric Society, vol. 41(6), pages 1043-48, November.
  5. James Tobin, 1975. "Keynesian Models of Recession and Depression," Cowles Foundation Discussion Papers 387, Cowles Foundation for Research in Economics, Yale University.
  6. Svensson, Lars E.O. & Rudebusch , Glenn, 1998. "Policy Rules for Inflation Targeting," Seminar Papers 637, Stockholm University, Institute for International Economic Studies.
  7. 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.
  8. Peter Flaschel & Hans-Martin Krolzig, 2003. "Wage and Price Phillips Curves An empirical analysis of destabilizing wage-price spirals," Economics Papers 2003-W16, Economics Group, Nuffield College, University of Oxford.
  9. Olivier Jean Blanchard & Lawrence Katz, 1999. "Wage Dynamics: Reconciling Theory and Evidence," NBER Working Papers 6924, National Bureau of Economic Research, Inc.
  10. 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.
  11. repec:cup:cbooks:9780521643511 is not listed on IDEAS
  12. 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.
  13. 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.
  14. 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.
  15. 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.
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