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Estimated non-linearities and multiple equilibria in a model of distributive-demand cycles

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  • Daniele Tavani
  • Peter Flaschel
  • Lance Taylor

Abstract

We introduce the results of a non-parametric estimate of the US wage-Phillips Curve into a simplified version of the model of the wage-price spiral by Flaschel and Krolzig (2008). Making use of Okun’s law, the non-linearity in the wage inflation-employment relation translates into a non-linearity in the so-called ‘distributive curve’ of the economy. Exploiting the observed non-linearity in extending an otherwise standard demand-distribution model (Taylor 2004), we provide a dynamical analysis both in wage-led and profit-led effective demand regimes. In a profit-led scenario, shown to be the empirically relevant case for the US economy, there are two stable equilibria of Goodwin (1967) growth cycle type, identified as a stable depression and a stable boom, and a saddle-path stable equilibrium in between them. Both stable steady states are surrounded by trajectories that cycle counterclockwise around their basins of attraction. The obtained type of growth fluctuations can be verified by a long phase cycle estimation for the US economy using a method developed by Kauermann, Teuber and Flaschel (2008).

Suggested Citation

  • Daniele Tavani & Peter Flaschel & Lance Taylor, 2011. "Estimated non-linearities and multiple equilibria in a model of distributive-demand cycles," International Review of Applied Economics, Taylor & Francis Journals, vol. 25(5), pages 519-538, October.
    • Handle: RePEc:taf:irapec:v:25:y:2011:i:5:p:519-538
    DOI: 10.1080/02692171.2010.534441
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    References listed on IDEAS

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    1. Tavani, Daniele, 2012. "Wage bargaining and induced technical change in a linear economy: Model and application to the US (1963–2003)," Structural Change and Economic Dynamics, Elsevier, vol. 23(2), pages 117-126.
    2. Daniele Tavani & Peter Flaschel & Lance Taylor, 2010. "Estimated Non-linearities & Multiple Equilibria in a Model of Distributive-Demand Cycles," SCEPA working paper series. 2010-6, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    3. Daniele Tavani, 2013. "Bargaining over productivity and wages when technical change is induced: implications for growth, distribution, and employment," Journal of Economics, Springer, vol. 109(3), pages 207-244, July.
    4. Skott,Peter, 2008. "Conflict and Effective Demand in Economic Growth," Cambridge Books, Cambridge University Press, number 9780521066310, October.
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