extent for example the US economy supports the types of real wage effects considered
in figure 1 and also the possibility for overall asymptotic stability for such an economy,
despite a destabilizing Mundell effect in the real interest rate channel.
4 Estimating the model
In this section we first of all provide single equation estimates for the laws of motion (1)
- (5) of our disequilibrium AS-AD model. These estimates, on the one hand, serve the
purpose of confirming the parameter signs we have specified in the initial formulation
of the model and to determine the size of these parameters in addition. On the other
hand, we have three situations where we cannot specify the parameter signs on purely
theoretical grounds and where we therefore aim at obtaining these signs from the empir-
ical estimates of the equations where this happens. There is first of all, see eq. (1), the
ambiguous influence of real wages on (the dynamics of) the rate of capacity utilization,
which should be a negative one if investment is more responsive than consumption to
real wage changes and a positive one in the opposite case. There is secondly, with an
immediate impact effect if the rates of capacity utilization for capital and labor are per-
fectly synchronized, the fact that real wages rise with economic activity through money
wage changes and the labor market, while they fall with it through price level changes
and the goods market, see eq. (4). Finally, we have in the theory of price level inflation
a further ambiguous effect of real wage increases, which there lower wage inflation while
speeding up price inflation, effects which work into opposite directions in the reduced
form price PC shown below eq.s (1) - (5).
In all of these three cases we expect that empirical analysis will provide us with infor-
mation which of these opposing forces will be the dominant one. Furthermore, we shall
also see that the Blanchard and Katz (2000) error correction terms do play a role in the
US-economy, in contrast to what has been found out by these authors for the money
wage PC. Finally, we will also attempt to estimate the parameter βπm that character-
izes the evolution of the inflationary climate. This however will be done only after we
have applied a moving average representation with linearly declining weights in a first
approach to the treatment of our climate expression.
We take a general to specific approach to specify the empirical model for the Keynesian
dynamics described in eq.s (1) - (5), i.e. we catch up first all dynamic properties of
the relevant variables in a general statistical model, in this linear case a VAR model.
We then test whether the theoretically motivated hypotheses on the parameters of the
dynamic model are supported by the data. If the theoretically hypotheses cannot be
rejected, then we will estimated a specific model where all these theoretical restrictions
are present.
The relevant variables are the wage inflation rate, the price inflation rate, the rates of
utilization of labor and of capital, and unit wage cost, to be denoted in the following by:
dwt ,dpt ,Vtl ,Vtc ,rt ,ukbpt , where ukbpt is the cycle component of the time series for the
unit wage cost, filtered by the bandpass filter.
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