General introduction ............................................ 1
PART I Conventional AD-AS modeling ............................. 13
1 Models of growth, inflation and the real-financial market
interaction
1.1 Disintegrated macro model building ..................... 15
1.2 Neoclassical growth theory and the long run ............ 19
1.2.1 The Solow model ................................. 20
1.2.2 Investment-driven growth ........................ 27
1.3 Phillips curve transition dynamics in the medium run ... 30
1.3.1 The model ....................................... 31
1.3.2 Local and global dynamic behavior ............... 34
1.3.3 Accelerating inflation, stagflation and
monetary policy ................................. 39
1.3.4 Comments ........................................ 42
1.4 Short-run real-financial market interaction ............ 44
1.4.1 The textbook model .............................. 44
1.4.2 Keynes' Notes on the trade cycle ................ 46
1.5 Outlook: towards integrated macrodynamics .............. 50
References ............................................. 52
2 Neglected textbook results: IS-LM-PC inflation dynamics
2.1 Feedback channels and stability issues ................. 54
2.2 Instantaneous real-financial market interaction ........ 60
2.3 Medium-run IS-LM-PC dynamics ........................... 63
2.4 Multiple steady states and local stability analysis .... 65
2.5 Global analysis I: basic phase diagram properties ...... 68
2.6 Global analysis II: kinked money wage Phillips curves .. 71
2.7 Numerical and empirical aspects of IS-LM-PC analysis ... 76
2.8 Zero interest rate bounds and full-employment
ceilings ............................................... 83
2.9 Policy rules for inflation targeting ................... 88
2.10 Conclusions ............................................ 93
References .................................................. 96
Appendix: Stability analysis of some textbook models ........ 97
3 Strange AS-AD outcomes: rational expectations inflation
theory
3.1 The postulates of Classical economics ................. 112
3.2 AS dynamics and the quantity theory of money .......... 115
3.3 Employment cycles in neoclassical monetary growth ..... 116
3.4 Employment cycles in Classical real growth ............ 122
3.5 Neoclassical employment dynamics from a Classical
perspective ........................................... 128
3.6 AD-AS dynamics under myopic perfect foresight ......... 132
3.7 Appended price dynamics and rational expectations? .... 140
3.7.1 Only predetermined variables and nominal
instability .................................... 140
3.7.2 Real wage continuity, p-jumps and nominal
stability ...................................... 142
3.8 A critique of rational expectations ................... 145
3.9 Outlook: gradual price adjustment processes ........... 149
References ................................................. 154
4 Taking Stock: Keynesian Dynamics and the AD-AS Framework
Amitava Dutt and Peter Skott
4.1 Introduction .......................................... 156
4.2 The AD-AS framework ................................... 156
4.3 Shortcomings .......................................... 162
4.4 The New Keynesian detour and the IKDD alternative ..... 166
4.4.1 Optimization ................................... 167
4.4.2 Stability and rational expectations ............ 169
4.4.3 Dynamics and expectations in IKDD models ....... 170
4.5 Post-Keynesian, Structuralist and Neo-Marxian
alternatives .......................................... 172
4.5.1 A short-run AD-AS model ........................ 172
4.5.2 The medium run: fairness and the 'natural
rate of unemployment' .......................... 175
4.5.3 The long ran: growth, accumulation and
technological change ........................... 176
4.6 Conclusion ............................................ 178
References ................................................. 179
PART II Matured Keynesian AD-AS model building
5 New Keynesian equilibrium vs. Keynesian disequilibrium
dynamics: two competing approaches
5.1 Introduction .......................................... 185
5.2 New Keynesian (Equilibrium) macrodynamics ............. 187
5.2.1 The New Keynesian model with staggered wages
and prices ..................................... 187
5.2.2 Determinacy analysis ........................... 188
5.3 Keynesian (Disequilibrium)AS-AD macrodynamics ......... 196
5.3.1 A Keynesian (D)AS-AD model ..................... 196
5.3.2 Local stability analysis ....................... 200
5.4 Concluding remarks .................................... 204
References ................................................. 206
6 Beyond neoclassical syntheses: a baseline DAS-AD model
6.1 Neoclassical syntheses ................................ 209
6.2 Traditional AD-AS with myopic perfect foresight -
a reminder ............................................ 212
6.3 Matured Keynesian model building: the DAS-AD
baseline case ......................................... 216
6.4 Local stability analysis: the feedback-guided
approach .............................................. 224
6.5 Real wage adjustment corrections and nominal
interest rate policy rules ............................ 229
6.6 On the role of downward money-wage rigidities ......... 233
6.7 Conclusion ............................................ 239
6.1 References ............................................ 240
Appendix I: Behavioral foundations ......................... 241
Appendix II: Proof to Section 6.6 .......................... 243
DAS-DAD dynamics: respecification and estimation of the
model ...................................................... 243
7 Christian Proano
7.1 Introduction .......................................... 253
7.2 A baseline semistructural macromodel .................. 254
7.2.1 The goods and labor markets .................... 254
7.2.2 The wage-price dynamics ........................ 255
7.2.3 Monetary policy ................................ 259
7.3 4D feedback-guided stability analysis ................. 262
7.4 Econometric analysis .................................. 265
7.4.1 Model estimation ............................... 265
7.5 Eigenvalue stability analysis ......................... 273
7.6 Concluding remarks .................................... 276
References ................................................. 278
8 Applied DAD-DAS modelling: elaboration and calibration
8.1 Introduction .......................................... 281
8.2 Econometric estimation: the point of departure ........ 283
8.3 Transforming the estimated equations into a closed
dynamic system ........................................ 286
8.3.1 Output and employment adjustments .............. 286
8.3.2 Labour productivity as an endogenous variable .. 288
8.3.3 Wage and price Phillips curves ................. 290
8.3.4 Reconsidering the monetary policy rule ......... 292
8.3.5 The 4D differential equations system ........... 294
8.3.6 The discrete-time formulation .................. 295
8.4 An improvement of the numerical coefficients .......... 297
8.4.1 A rough-and-ready calibration of the
inflation climate .............................. 297
8.4.2 Re-estimation of the Phillips curves ........... 300
8.4.3 Impulse-response functions as a more detailed
evaluation criterion ........................... 302
8.4.4 Variabilities in the stochastic economy ........ 305
8.5 Working with the model ................................ 308
8.5.1 A cutback in workers' ambitions ................ 308
8.5.2 Wage and price flexibility: eigenvalue
analysis ....................................... 310
8.5.3 Wage and price flexibility: variabilities in
the stochastic economy ......................... 315
8.6 Conclusion 318 References ............................. 319
9 Sophisticatedly simple expectations in the Phillips curve
and optimal monetary policy
9.1 Introduction .......................................... 320
9.2 The Rudebusch-Svensson model .......................... 323
9.2.1 Formulation of the model ....................... 323
9.2.2 The Taylor rule in the basic model ............. 326
9.2.3 The role of measurement errors ................. 329
9.2.4 Small sample variability ....................... 331
9.3 Sophisticatedly simple expectations and their
implications .......................................... 333
9.3.1 The concept of the adaptive inflation climate .. 333
9.3.2 A comparison of impulse-response functions ..... 336
9.3.3 Monetary policy in the AIC model ............... 338
9.3.4 The role of inflation persistence .............. 344
9.3.5 A note on interest rate smoothing .............. 345
9.4 Conclusion ............................................ 348
References ................................................. 349
PART III The road ahead: real-financial market interaction
from a Keynesian perspective
10 The Keynes-Metzler-Goodwin model and Tobinian portfolio
choice
10.1 Real disequilibria, portfolio equilibrium and the
real-financial markets interaction .................... 353
10.2 A portfolio approach to KMG growth dynamics ........... 356
10.2.1 Households ..................................... 356
10.2.2 Firms .......................................... 359
10.2.3 Fiscal and monetary authorities ................ 363
10.2.4 Wage-price interactions ........................ 364
10.2.5 Capital markets: gross substitutes and
stability ...................................... 365
10.2.6 Capital gains: fundamentalists' and
chartists' expectations ........................ 367
10.3 The model in intensive form ........................... 369
10.4 The comparative statics of the asset markets .......... 376
10.5 Stability ............................................. 380
10.3 The quantitative study of persistent business
fluctuations .......................................... 383
10.7 Outlook ............................................... 388
References ................................................. 390
Appendix: Propositions 4-9 (alternative formulations and
proofs) .................................................... 391
General introduction
Notation ...................................................... 410
Mathematical appendix: some stability theorems ................ 413
Index ......................................................... 421
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