Pu Chen (Faculty of Economics, University of Bielefeld) Carl Chiarella () (School of Finance and Economics, University of Technology, Sydney) Peter Flaschel (Faculty of Economics, University of Bielefeld) Willi Semmler (Bernhard Schwartz Center for Economic Policy Analysis, New School University and Center for Empirical Macroeconomics, University of Bielefeld, Bielefeld,)
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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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Paper provided by School of Finance and Economics, University of Technology, Sydney in its series Working Paper Series with number
147.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Glenn Rudebusch & Lars E.O. Svensson, 1999.
"Policy Rules for Inflation Targeting,"
NBER Chapters,
in: Monetary Policy Rules, pages 203-262
National Bureau of Economic Research, Inc.
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Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
Toichiro Asada & Carl Chiarella & Peter Flaschel & Christian R. Proaño, 2007.
"Keynesian AD-AS, Quo Vadis?,"
Working Paper Series
151, School of Finance and Economics, University of Technology, Sydney.
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