Are Dynamic Stochastic Disequilibrium models Keynesian or neoclassical?

Christian Schoder

Structural Change and Economic Dynamics, 2017, vol. 40, issue C, 46-63

Abstract: Dynamic Stochastic Disequilibrium (DSDE) models share the micro-foundations of Dynamic Stochastic General Equilibrium (DSGE) models based on inter-temporal optimization and rational expectations. Yet, it features the principle of effective demand which is at the core of Traditional Post-Keynesian (TPK) models and follows from the perception that the wage inflation is a policy variable rather than a labor-market clearing variable. In order to locate the DSDE model among the traditions of economic thought, the paper compares DSDE first-order conditions of optimal behavior with TPK rule-of-thumb behavior. It further compares the economic propagation of a DSDE model to those of a DSGE and TPK model as well as a Synthetic Neoclassical (SNC) model which features TPK behavioral assumptions and labor-market clearing. We arrive at two core conclusions: First, apart from assumptions regarding expectation formation, orthodox micro-foundation is, to a considerable extent, consistent with the behavioral hypotheses underlying TPK models. Second, the economy characterized by the DSDE model is essentially post-Keynesian rather than neoclassical because it features the principle of effective demand.

Keywords: Dynamic Stochastic Disequilibrium; Dynamic Stochastic General Equilibrium; Post-Keynesian economics; Micro-foundations (search for similar items in EconPapers)
JEL-codes: B41 E12 J52 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:streco:v:40:y:2017:i:c:p:46-63

DOI: 10.1016/j.strueco.2016.11.004

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