Keynes-Metzler-Goodwin Model Building: The Closed Economy

T. Asada, Carl Chiarella () and Peter Flaschel
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Peter Flaschel: Department of Economics, University of Bielefeld

No 124, Working Paper Series from School of Finance and Economics, University of Technology, Sydney

Abstract: In the framework of a recently established Keynesian type monetary macro model, the so-called KMG model, we study implications of kinked Phillips curves and alternative monetary policy rules. As alternative monetary policy rules we consider monetary growth targeting and interest rate targeting (the Taylor rule). Our monetary macro model exhibits: asset market clearing, disequilibrium in product and labor markets, sluggish price and quantity adjustments, two Phillips-Curves for wage and price dynamics, and a combination of medium-run adaptive and short-run forward looking expectations. Simulations of the model with our estimated parameters reveal global instability of its steady state. We show that monetary policy can stabilize the dynamics to some extent and that, in addition, an institutionally given kink in the money wage Phillips-Curve (downwardly rigid wages) represents a powerful mechanism for obtaining bounded, more or less irregular fluctuations in the place of purely explosive ones. The resulting fluctuations can be reduced in size by choosing the parameters of monetary policy within a certain corridor, the exact position of which may however be rather uncertain.

Keywords: kmg dynamics; feedback channels; instability; monetary policy; wage floors; fluctuating growth; complex dynamics (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2003-01-01
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