Keynesian dynamics and the wage–price spiral: A baseline disequilibrium model

We reformulate the traditional AS-AD growth model of the Neoclassical synthesis, stage I, as a disequilibrium approach to aggregate supply analysis, with sticky wages, sticky prices, myopic perfect foresight on current inflation rates, and adaptively formed medium-run expectations concerning the inv...

Full description

Saved in:
Bibliographic Details
Published in:Journal of macroeconomics 2006-03, Vol.28 (1), p.90-130
Main Authors: Asada, Toichiro, Chen, Pu, Chiarella, Carl, Flaschel, Peter
Format: Article
Language:English
Subjects:
(In)stability
Business cycles
DAS-AD growth
Dynamic models
Economic dynamics
Economic models
Economic theory
Growth models
Interest rates
Keynesian theory
Kinked Phillips curves
Macroeconomics
Non-linear models
Persistent cycles
Phillips curve
Real interest channels
Real wage channels
Real wages
Studies
Transmission mechanism
Wage and price Phillips curves
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:We reformulate the traditional AS-AD growth model of the Neoclassical synthesis, stage I, as a disequilibrium approach to aggregate supply analysis, with sticky wages, sticky prices, myopic perfect foresight on current inflation rates, and adaptively formed medium-run expectations concerning the investment and the inflation climate. Both LM curve and an interest rate policy rule are considered. The resulting nonlinear 5D model of labor and goods market disequilibrium avoids striking anomalies of the traditional Neoclassical synthesis AS-AD model. It exhibits instead Keynesian feedback dynamics proper with asymptotic stability for low adjustment speeds and with cyclical loss of stability when some adjustment speeds are sufficiently large. In such cases, downward money wage rigidities serve to make the overall dynamics bounded and thus viable. We thus obtain a baseline D(is equilibrium)AS-AD model with Keynesian feedback channels with a rich set of stability/instability features as sources of the business cycle. The outcomes of the model stand in stark contrast to those of the currently fashionable (closely related) model of the New Keynesian alternative.
ISSN:0164-0704
1873-152X
DOI:10.1016/j.jmacro.2005.10.007