A Keynesian Dynamic Stochastic Disequilibrium model for business cycle analysis

Christian Schoder

No 1701, Working Papers from New School for Social Research, Department of Economics

Abstract: A Dynamic Stochastic Disequilibrium (DSDE) model is proposed for business cycle analysis. Unemployment arises from job rationing due to insufficient aggregate spending. The nominal wage is taken as a policy variable subject to a collective Nash bargaining process between workers and firms with the state of the labor market affecting the relative bargaining power. A precautionary saving motive arising from an uninsurable risk of permanent income loss implies an equilibrium relation between consumption, income and wealth. The DSDE model differs from the corresponding Dynamic Stochastic General Equilibrium (DSGE) model with labor market clearing in important respects: (i) Output is determined from the demand side and not from the supply side; (ii) The steady-state interest rate cannot be interpreted as a natural rate; (iii) It has to be smaller than the rate of economic growth in order for a steady state to exist; (iv) Determinacy of the solution requires the monetary policy response to in ation to be high (low) at low (high) steady-state interest rates; (v) Fighting in ation is stabilizing in the active monetary policy regime but destabilizing in the passive monetary policy regime; (vi) Macroeconomic responses to monetary policy and productivity shocks are similar to those of the DSGE model but give more weight to quantity adjustment and predict the real wage to increase with productivity.

Keywords: Dynamic stochastic disequilibrium; labor market disequilibrium; labor rationing; collective wage bargaining; monetary policy (search for similar items in EconPapers)
JEL-codes: B41 E12 J52 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2017-01
New Economics Papers: this item is included in nep-dge, nep-lab, nep-mac and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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http://www.economicpolicyresearch.org/econ/2017/NSSR_WP_012017.pdf First version, 2017 (application/pdf)

Related works:
Journal Article: A Keynesian Dynamic Stochastic Disequilibrium model for business cycle analysis (2020)
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