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A Keynesian Dynamic Stochastic Disequilibrium model for business cycle analysis

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  • Schoder, Christian

Abstract

A Dynamic Stochastic Disequilibrium model is proposed for business cycle analysis. The core innovation and fundamental deviation from the corresponding full-employment Dynamic Stochastic General Equilibrium model is the assumption that the nominal wage is a policy variable with no tendency to clear the labor market. As a consequence, disequilibrium unemployment arises which crucially alters the transmission of macroeconomic shocks. Solving the puzzle of low fiscal multipliers in conventional general equilibrium models, the effects of spending shocks become considerably more pronounced in the disequilibrium model because idle labor can be quickly utilized to accommodate aggregate demand without requiring households to increase their supply. In contrast to the standard model, technology and labor supply shocks are partly absorbed by unemployment and, hence, only moderately expansionary. Despite its simplicity and unlike the corresponding general equilibrium model, the disequilibrium model is able to generate shock responses which are broadly in line with empirical evidence.

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  • Schoder, Christian, 2020. "A Keynesian Dynamic Stochastic Disequilibrium model for business cycle analysis," Economic Modelling, Elsevier, vol. 86(C), pages 117-132.
    • Handle: RePEc:eee:ecmode:v:86:y:2020:i:c:p:117-132
    DOI: 10.1016/j.econmod.2019.06.006
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    More about this item

    Keywords

    Dynamic Stochastic Disequilibrium; Labor market disequilibrium; Labor rationing; Unemployment; Collective wage bargaining;
    All these keywords.

    JEL classification:

    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation

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