of price inflation, since we have a positive influence of this climate variable both on
price as well as on wage inflation and from there on rates of employment of both capital
and labor. Excess profitability depends positively on the inflation rate and thus on the
inflationary climate as the reduced-form price Phillips curve in particular shows.
There is a further important potentially (at least partially) destabilizing feedback mech-
anism as the model is formulated. Excess profitability depends positively on the rate of
return on capital ρ and thus negatively on the real wage ω. We thus get - since con-
sumption may also depend (positively) on the real wage - that real wage increases can
depress or stimulate economic activity depending on whether investment or consumption
is dominating the outcome of real wage increases (we here neglect the stabilizing role of
the Blanchard / Katz type error correction mechanisms). In the first case, we get from
the reduced-form real wage dynamics:
ω = κ [(1 - κP)βw (Vl - Vl ) - (1 - κw )βP (Vc - Vc)] ■
that price flexibility should be bad for economic stability due to the minus sign in
front of the parameter βp while the opposite should hold true for the parameter that
characterizes wage flexibility. This is a situation as it was already investigated in Rose
(1967). It gives the reason for our statement that wage flexibility gives rise to normal
and price flexibility to adverse Rose effects as far as real wage adjustments are concerned
(if it is assumed - as in our baseline model - that only investment depends on the real
wage). Besides real rate of interest effect, establishing opposing Keynes- and Mundell-
effects, we thus have also another real adjustment process in the considered model where
now wage and price flexibility are in opposition to each other, see Chiarella and Flaschel
(2000) and Chiarella, Flaschel, Groh and Semmler (2000) for further discussion of these
as well as other feedback mechanisms in Keynesian growth dynamics. We stress again
that our DAS-AD growth dynamics - due to their origin in the baseline model of the
Neoclassical Synthesis, stage I - allows for negative influence of real wage changes on
aggregate demand solely, and thus only for cases of destabilizing wage level flexibility,
but not price level flexibility. In the empirical estimation of the model we will indeed
find that this case seems to be the typical one in dynamic models of the AS-AD variety.
This adds to the description of the dynamical system (1) - (5) whose stability proper-
ties are now to be investigated by means of varying adjustment speed parameters. With
the feedback scenarios considered above in mind, we first observe that the inflationary
climate can be frozen at its steady state value, here ∏m = π, if βπm = 0 is assumed. The
system thereby becomes 4D and it can indeed be further reduced to 3D if in addition
αω =0,γω =0,βw2 =0,βp2 = 0 is assumed, since this decouples the ω-dynamics from
the remaining system Vc ,Vl ,r. We will consider the stability of these 3D subdynamics
- and its subsequent extensions - in informal terms here only, reserving rigorous cal-
culations to the alternative scenarios provided in Asada, Chiarella, Flaschel and Hung
(2004). We nevertheless hope to show to the reader how one can proceed from low to
high dimensional analysis in such stability investigations. This method has been already
applied to various other, often much more complicated, dynamical systems, see Asada,
Chiarella, Flaschel and Franke (2003) for a variety of typical examples.
Before we start with these stability investigations we establish that loss of stability can
in general only occur in the considered dynamics by way of Hopf-bifurcations, since the
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