Keynesian Dynamics and the Wage-Price Spiral: A Baseline Disequilibrium Model

Toichiro Asada, Pu Chen (), Carl Chiarella () and Peter Flaschel
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Toichiro Asada: Faculty of Economics, Chuo University
Peter Flaschel: Department of Economics, University of Bielefeld

No 139, Working Paper Series from School of Finance and Economics, University of Technology, Sydney

Abstract: We reformulate and extend the standard AS-AD growth model of the Neoclassical Synthesis (stage I) with its traditional microfoundations. The model retains 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 the inflation climate in which the economy is operating. The resulting nonlinear 5D model of labor and goods market disequilibrium dynamics avoids the striking anomalies of the standard AS-AD 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 suciently large, eventually leading to purely explosive dynamics. In such cases, downward money wage rigidity serves to make the overall dynamics bounded and thus viable. We thus obtain and analyze a baseline D(isequilibrium)AS-AD model characterised by Keynesian feedback channels with a rich set of stability/instability features as the sources of the business cycle. The outcomes of the model stand in stark contrast to those of the currently fashionable baseline model of the New Keynesian alternative (the Neoclassical Synthesis, stage II) that we suggest is more limited in scope.

Keywords: DAS-AD growth; wage and price Phillips curves; real interest eects; real wage effects; (in)stability; persistent cycles; inflation and deflation (search for similar items in EconPapers)
JEL-codes: E24 E31 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2004-12-01
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Journal Article: Keynesian dynamics and the wage-price spiral: A baseline disequilibrium model (2006)
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