Keynesian Dynamics and the Wage-Price Spiral:Estimating a Baseline Disequilibrium Approach



which finally gives

0

0

0

0

+

00

0

0

J=

0

00

0

+.

0

+0

0

0

0

00

+

0

This matrix is easily shown to exhibit a

negative determinant which proves the propo-

sition, also for all values of γr = γω which are chosen sufficiently small.

Proposition 2:

Assume in addition that the parameters βw2 p2 ωω and βπm are all set
equal to zero which decouples the dynamics of
V c,Vl ,r from the rest of the
system. Assume furthermore that the partial derivative of the first law of
motion depends negatively on
V c , i.e., the dynamic multiplier process, char-
acterized by
αVc , dominates this law of motion with respect to the impact of
V c.6 Then: The interior steady state of the implied 3D dynamical system

^ - .- — -. ..     .. ..             ..

V  =  -αv c ( V V) αr (( r p) ( Го π))          (6)

V l  =  βvι( Vc Vc )                                      (7)

Г  =  Yr ( r Го ) + Yp ( p> ) + YV c ( Vc Vc )           (8)

is locally asymptotically stable if the interest rate smoothing parameter γr and
the employment adjustment parameter
βVl are chosen sufficiently small.

Sketch of proof: In the considered situation we have for the Jacobian of these reduced
dynamics at the steady state:

J=

The determinant of this Jacobian is obviously negative if the parameter Yr is chosen
sufficiently small. Similarly, the sum of the minors of order 2:
a2 , will be positive if βVl
is chosen sufficiently small. The validity of the full set of Routh-Hurwitz conditions then
easily follows, since trace J =
a1 is obviously negative and since det J is part of the
expressions that characterize the product
a 1 a2.                                        ■

Proposition 3:

Assume now that the parameter αω is negative, but chosen sufficiently small,
while the error correction parameters
βw2 p2 are still kept at zero (as is the

6i.e., αVc > αpκκpβw .

13



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