Abstract
We reformulate the traditional AS-AD growth model of the Neoclassical synthesis, stage I, as a disequilibrium approach to aggregate supply analysis, with sticky wages, sticky prices, myopic perfect foresight on current inflation rates, and adaptively formed medium-run expectations concerning the investment and the inflation climate. Both LM curve and an interest rate policy rule are considered. The resulting nonlinear 5D model of labor and goods market disequilibrium avoids striking anomalies of the traditional Neoclassical synthesis AS-AD model. It exhibits instead Keynesian feedback dynamics proper with asymptotic stability for low adjustment speeds and with cyclical loss of stability when some adjustment speeds are sufficiently large. In such cases, downward money wage rigidities serve to make the overall dynamics bounded and thus viable. We thus obtain a baseline D(is equilibrium)AS-AD model with Keynesian feedback channels with a rich set of stability/instability features as sources of the business cycle. The outcomes of the model stand in stark contrast to those of the currently fashionable (closely related) model of the New Keynesian alternative.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
