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

We expect that these five time series are stationary. The graphs of the series wage and
price inflation, capacity utilization rates and labor productivity growth, dwt ,dpt ,V_t^l ,V_t^c , dynt ,
confirm our expectation. In additional we carry out DF unit root test for each series.
The test results are shown in table 2.

Table 2: Summary of DF-Test Results

4.2 Estimation of unrestricted VAR

The unit root test confirms our expectation with the exception of V_t^l and rt . Although
the test cannot reject the null of unit root, there is no reason to expect the rate of
unemployment and the federal funds rate as being a unit root process. Indeed we expect
that they are constrained in certain limited ranges, say from zero to 0.3. Due to the lower
power of DF test, the test result should only provide hints that the rate of unemployment
and the federal funds rate have a strong autocorrelation, respectively.

Given this stationarity we can construct a VAR model for these 6 variables to mimic
the DGP of these 6 variables.

To determine the lag length of the VAR we apply sequential likelihood tests. We start
with a lag length of 24, at which the residuals can be taken as WN process. The
sequence likelihood ratio test procedure gives a lag length of 9. The test results are
listed as follows.

• H0 : P = 20 v.s. H1 : P =24

Chi-Squared(144)= 150.01095 with Significance Level 0.34880

• H0 : P = 16 v.s. H1 : P =20

Chi-Squared(144)= 148.82953 with Significance Level 0.37424

• H0 : P = 12 v.s. H1 : P =16

Chi-Squared(25)= 120.97749 with Significance Level 0.91874

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