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Keynesian-Monetarist Dynamics and the Corridor

Author

Listed:
  • : Christian Groth

    (Institute of Economics, University of Copenhagen)

Abstract

The idea that for small disturbances the full employment equilibrium is stable while for large disturbances it is unstable was coined by Leijonhufvud in the notion of a "corridor". We discuss the existence of a corridor in the standard Keynesian-Monetarist textbook macro-model. It turns out that though the full employment steady state of this model may be locally stable - which is the case when the well-known Cagan condition holds - the model is never globally stable. This is due to the inherent non-linearity in the demand for money function, arising from non-negativity of the nominal rate of interest. Thus, perhaps surprisingly, the Cagan condition is both necessary and sufficient for the existence of a corridor in the Keynesian-Monetarist model.

Suggested Citation

  • : Christian Groth, 1993. "Keynesian-Monetarist Dynamics and the Corridor," Discussion Papers 93-13, University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:kuiedp:9313
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    Citations

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    Cited by:

    1. Christian Groth, 1993. "Some unfamiliar dynamics of a familiar macro model a note," Journal of Economics, Springer, vol. 58(3), pages 293-305, October.
    2. Palley, Thomas I., 2008. "Keynesian models of deflation and depression revisited," Journal of Economic Behavior & Organization, Elsevier, vol. 68(1), pages 167-177, October.
    3. Flaschel, Peter & Sethi, Rajiv, 1996. "Classical dynamics in a general model of the Keynes-Wicksell type," Structural Change and Economic Dynamics, Elsevier, vol. 7(4), pages 401-428, December.

    More about this item

    Keywords

    IS-LM dynamics; global dynamics; corridor; deflation; liquidity trap; Hopf bifurcation;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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