Finance Discipline Group
UTS Business School
University of Technology, Sydney

Working Paper Series

Title:
Keynesian Dynamics and the Wage-Price Spiral: A Baseline Disequilibrium Model
Author(s): Toichiro Asada, Pu Chen, Carl Chiarella & Peter Flaschel
Date of publication: December 2004
Working paper number: 139
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.
Paper: Download (Format: PDF, Size: 710 Kb)
Comments: Published as: Asada, T., Chen, P., Chiarella, C. and Flaschel, P., 2006, "Keynesian Dynamics and the Wage-Price Spiral: A Baseline Disequilibrium Model", Journal of Macroeconomics, 28(1), 90-130.
Known citations:

Asada, T., 2006, "Stabilization Policy in a Keynes–Goodwin Model with Debt Accumulation", Structural Change and Economic Dynamics, 17(4), 466-485.

Asada, T., 2012, "Monetary Stabilization Policy by Means of Taylor Rule in a Dynamic Keynesian Model with Capital Accumulation", In Ryuzo Kuroki (ed) Keynes and Modern Economics,

Asada, T., Chen, P., Chiarella, C. and Flaschel, P., 2006, "AD–AS and the Phillips Curve: A Baseline Disequilibrium Model", Contributions to Economic Analysis, 277, 173-227.

Asada, T., Chairella, C., Flaschel, P. and Proano, C. R., 2007, "Keynesian AD-AS, Quo Vadis?", Working Paper Number: 151, Finance Discipline Group, University of Technology, Sydney.

Asada, T., Flachel, F., Groh, G. and Proano, C. R., "Continuous Time, Period Analysis and Chaos from an Empirical Perspective", Working Paper, University of Bielefeld.

Chen, P., Chiarella, C., Flaschel, P. and Semmler, W., 2006, "Keynesian Macrodynamics and the Phillips Curve. An Estimated Baseline Macro-Model for the U.S. Economy", in Chiarella, C., Flaschel, P., Franke, R. and Semmler, W. (eds): Quantitative and Empirical Analysis of Nonlinear Dynamic Macromodels, Contributions to Economic Analysis (Series editors: B. Baltagi, E. Sadka and D. Wildasin), Elsevier, Amsterdam.

Chiarella, C., Flaschel, P. and Semmler, W., 2013, Reconstructing Keynesian Macroeconomics Volume 2: Integrated Approaches, Routledge, New York.

Dos Santos Ferreira, R. and Michel, P., 2013, "Keynes' Wage–Price Dynamics", Metroeconomica, 64(1), 44-72.

Ferri, P., 2006, "Fluttuazioni endogene, deflazione da debiti e instabilità finanziaria", Moneta e Credito, 59(234), 129-149.

Ferri, P., 2010, "Growth cycles and the Financial Instability Hypothesis (FIH)", In Dimitri B. Papadimitriou and L. Randall Wray (eds) The Elgar Companion to Hyman Minsky, Edward Elgar.

Ferri, P., 2012, "Fluttuazioni endogene, deflazione da debiti e instabilità finanziaria (Endogenous fluctuations, debt deflation and financial instability)", Working Paper, University of Rome.

Ferri, P. and Variato, A. M., 2010, "Imperfect Competition, Learning and Fluctuations", Nonlinear Dynamics in Economics, Finance and Social Sciences, 215-228.

Flaschel, P., 2009, The Macrodynamics of Capitalism: Elements for a Synthesis of Marx, Keynes and Schumpeter, Springer.

Flaschel, P., 2009, The Macrodynamics of Capitalism: Elements for a Synthesis of Marx, Keynes and Schumpeter, 2nd ed., Springer-Verlag, Germany.

Flaschel, P., Groh, G., Proano, C. and Semmler, W., 2008, "Period Models, Continuous Time and Applied Macrodynamics", Topics in Applied Macrodynamic Theory Dynamic Modeling and Econometrics in Economics and Finance Volume 10, 1-32.

Flaschel, P., Groh, G., Proano, C. and Semmler, W., 2008, "The AS–AD Framework: Origins, Problems and Progress", Topics in Applied Macrodynamic Theory Dynamic Modeling and Econometrics in Economics and Finance Volume 10, 35-89.

Flaschel, P., Groh, G., Proano, C. and Semmler, W., 2008, "Estimation and Analysis of an Extended AD–AS Model", Topics in Applied Macrodynamic Theory Dynamic Modeling and Econometrics in Economics and Finance Volume 10, 137-212.

Franke, R., Flaschel, P. and Proano, C. R, 2006, "Wage-Price Dynamics and Income Distribution in a Semi-Structural Keynes-Goodwin Model", Structural Change and Economic Dynamics, 17(4), 452-465.

Hayo, B. and Niehof, B., 2013, "Spillovers in a New Keynesian Continuous Time Framework with Financial Markets", Working Paper.

Malikane, C., 2012, "The Microfoundations of the Keynesian Wage-Price Spiral", Working Paper, University of Munich.

Malikane, C. and Mokoka, T., 2012, "Monetary Policy Credibility: A Phillips Curve View", The Quarterly Review of Economics and Finance, 52(3), 266-271.

Malikane, C. and Semmler, W., 2008, "Asset Prices, Output And Monetary Policy In A Small Open Economy", Metroecoomica, 59(4), 2008.

Malikane, C. and Semmler, W., 2008, "The Role of the Exchange Rate in Monetary Policy Rules: Evidence from a Dynamic Keynesian Model", Working Paper, University of Bielefeld.

Rescador, J. D. P., 2011, "An·lisis de estabilidad a partir de la estimaciÛn de un modelo de desequilibrio keynesiano para la economÌa colombiana", Working Paper, Universidad Nacional de Colombia.

Pan, X., Chen, J. and Ju, X., 2009, "A Research on Growth Capability of Chinese High-tech Industry Evaluation Based on Analytic Hierarchy Process", Presentation at the 2009 International Conference on Management Science & Engineering, September 14-16, Moscow, Russia.

Proano, C. R, 2007, Essays on Gradual Wage-Price Adjustments, Monetary Unions and Open Economy Macrodynamics, PhD Thesis, University of Beilefeld.

Proano, C. R., 2008, "Gradual Wage-Price Adjustments and Keynesian Macrodynamics: Evidence from the U.S. and Major European Countries", Working Paper, University of Bielefeld.

Proano, C. R., Ernst, E., Flaschel, P. and Semmler, W., 2005, "Comparing U.S. and Euro Area Wage and Price In°ation Dynamics", Working Paper, University of Bielefeld.

Proano, C. R., Ernst, E., Flaschel, P. and Semmler, W., 2006, "Gradual Wage-Price Adjustments and Keynesian Macrodynamics: Evidence from the US and the Euro Area", Macroeconomic Policy Institute (IMK), IMK Working Paper 4.

Proano, C. R., Ernst, E., Flaschel, P. and Semmler, W., 2006, "Disequilibrium Macroeconomic Dynamics, Income Distribution and Wage-Price Phillips Curves. Evidence from the U. S. and the Euro Area", Working Paper: 4/2006, Macroeconomic Policy Institute.

Stellian, R., 2012, Financiarisation, gouvernance actionnariale et crise économique: Une approche monétaire, la problématique de la viabilité, PhD Thesis, University of Grenoble.

Stockhammer, E., 2008, "Is the NAIRU Theory a Monetarist, New Keynesian, Post Keynesian or a Marxist Theory?", Metroeconomica, 59(3), 479-510.

Wintoki, M. B., Linck, J. S. and Netter, J. M., 2012, "Endogeneity and the Dynamics of Internal Corporate Governance", Journal of Financial Economics, 105(3), 581-606.