Finance Discipline Group
UTS Business School
University of Technology, Sydney

Working Paper Series

Keynesian Macrodynamics and the Phillips Curve. An Estimated Baseline Macromodel for the U.S. Economy
Author(s): Pu Chen, Carl Chiarella, Peter Flaschel & Willi Semmler
Date of publication: March 2006
Working paper number: 147
In this paper we formulate a baseline disequilibrium AS-AD model and empirically estimate it with time series data for the US-economy. The version of the model used here exhibits a Phillips-curve, a dynamic IS curve and a Taylor interest rate rule. It is based on sticky wages and prices, perfect foresight of current inflation rates and adaptive expectations concerning the inflation climate in which the economy operates. A version of Okun's law is used to link capacity utilization to employment. Our proposed nonlinear 5D model of real market dynamics overcomes anomalies of the old Neoclassical synthesis and also the rational expectations methodology of the new Neoclassical Synthesis. It resembles New Keynesian macroeconomics but permits nonclearing of markets. It exhibits typical Keynesian feedback structures with asymptotic stability of its steady state for low adjustment speeds and with loss of stability { generally by way of Hopf bifurcations { when certain adjustment speeds are made sufficiently large. We provide system estimates of our model, for quarterly time series data of the U.S. economy 1965.1-2001.1, and study the stability features of the U.S. economy with respect to its various feedback channels from an empirical perspective. Based on these estimates, which in particular imply that goods market dynamics are profit led, we find that the dynamics are strongly convergent around the steady state, if monetary policy is sufficiently active, but will lose this feature if the inflationary climate variable or the price inflation rate itself adjusts sufficiently fast. We also study to what extent more active interest rate feedback rules or downward wage rigidity can stabilize the dynamics in the large when the steady state is locally repelling. We study the economy's behavior due to faster adjustments. We find that monetary policy should allow for sufficient steady state inflation in order to avoid stability problems in areas of the phase space where wages are not flexible in a downward direction.
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Comments: Published as: Chen, P., Chiarella, C., Flaschel, P. andSemmler, 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.
Known citations:

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.

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

Chen, P. and Hsiao, C., 2007, "Learning Causal Relations in Multivariate Time Series Data", Economics: Discussion Paper Number: 2007-15, Kiel Institute for the World Economy.

Chen, P. and Hsiao, C., 2008, "What Happens to Japan if China Catches a Cold?: A Causal Analysis of Chinese Growth and Japanese Growth", Japan and the World Economy, 20(4), 622-638.

Chen, P., Hsiao, C., Flaschel, P. and Semmler, W., 2008, "Causal Analysis in Economics: Methods and Applications", Presentation at the 13th Australasian Macroeconomics Workshop.

Chen, P. and Flaschel, P., 2005, "Keynesian Dynamics and the Wage–Price Spiral: Identifying Downward Rigidities", Computational Economics, 25(1), 115-142.

Chiarella, C, Flaschel, P. and Semmler, W., 2013, Reconstructing Keynesian Macroeconomics Volume 2: Integrated Approaches, Routledge, 978-0-415-66857-6.

Chiarella, C., Hung, H. and Flaschel, P., 2010, "Keynesian Macrodynamics: Convergence, Roads to Instability and the Emergence of Complex Business Fluctuations", AUCO Czech Economic Review, 4(3), 236-262.

Diallo, M. B., Flaschel, P., Krolzig, H. and Proaño, C. R., 2011, "Reconsidering the Dynamic Interaction between Real Wages and Macroeconomic Activity", Research in World Economy, 2(1), 77-93.

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

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

Flaschel, P. and Greiner, 2012, Flexicurity Capitalism: Foundations, Problems, and Perspectives, Oxford University Press.

Flaschel, P., Groh, G., Proaño, C. R. and Semmler, W., 2008a, "Keynesian Dynamics and International Linkages in a Two-Country Model", In Topics in Applied Macrodynamic Theory, Springer, 978-3-540-72542-8.

Flaschel, P., Groh, G., Proaño, C. R. and Semmler, W., 2008b, "Estimation and Analysis of an Extended AD–AS Model", In Topics in Applied Macrodynamic Theory, Springer, 978-3-540-72542-8.

Flaschel, P., Kauermann, G. and Semmler, W., 2007, "Testing Wage and Price Phillips Curves For the United States", Metroeconomica, 58(4), 550-581.

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

Proaño, C. R., 2007, "Essays on Gradual Wage-Price Adjustments, Monetary Unions and Open Economy Macrodynamics", Working Paper, University of Bielefeld.

Proaño, C. R., 2009, "(De-)Stabilizing Two-Country Macroeconomic Interactions in an Estimated Model of the U.S. and the Euro Area", International Economics and Economic Policy, 6(4), 421-443.

Proaño, C. R., 2011, "Exchange Rate Determination, Macroeconomic Dynamics and Stability Under Heterogeneous Behavioral FX Expectations", Journal of Economic Behavior and Organization, 77(2), 177-188.

Proaño, C. R., 2012, "Gradual Wage-Price Adjustments, Labor Market Frictions and Monetary Policy Rules", Journal of Economic Behavior and Organization, 82(1), 220-235.

Proaño, C. R., Flaschel, P., Diallo, M. B. and Teuber, T., 2008, "Distributive Cycles, Business Fluctuations and the Wage-led/Profit-led Debate", Working Paper Number: 154, University of Bielefeld.

Proaño, C. R., Flaschel, P., Krolzig, H. and Diallo, M. B., 2011, "Monetary Policy and Macroeconomic Stability Under Alternative Demand Regimes", Cambridge Journal of Economics, 35(3), 569-585.