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

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).