The necessary condition for stability in Tobin's Walras-Keynes-Phillips model: A note

Subrata Guha

Economics Bulletin, 2011, vol. 31, issue 1, 66-74

Abstract: In a 1975 paper entitled 'Keynesian Models of Recession and Depression' James Tobin sought to formalize in a dynamic model Keynes' argument that unemployment could persist in an economy with flexible wages and prices. In the course of his analysis Tobin presented, without proof, a 'critical necessary condition for stability' of the full employment equilibrium which is violated when expenditure is sufficiently responsive to the expected inflation rate. This note contends that later attempts in the literature to prove that Tobin's condition is necessary for stability have been unsuccessful and provides a valid proof of the same result. The note also demonstrates the existence of a sufficient condition for instability of equilibrium which is weaker than the negation of Tobin's condition.

Keywords: Keynes; Tobin-Mundell effect; stability of equilibrium (search for similar items in EconPapers)
JEL-codes: C6 E1 (search for similar items in EconPapers)
Date: 2011-01-04
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