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

with

p — const + κ [ βp 1 V^c + βp 2 ω + Kp ( βw 1 V^l — βw 2 ω )] + π^m

with the variables: capacity utilization V^c , the rate of employment V^l , the rate of interest
r, and the inflationary climate π^m, and the real wage ω .

Inserting finally the estimated values into these reformulated equations gives rise to the
following numerical specification of this model type

V^c — const — 0.08 V^c — 0.38 ω — 0.089( r — p)

V^l — const + 0.01V^c + 0. 15 V^c

r — const — 0.08 r + 0.44p + 0.08 V^c

ω — const + 0. 10 V^l — 0.025V^c — 0.067ω

π^m — β_πm (p — π^m), β_πm to be determined still

with

p — const + 0.04 V^c + 0. 13 V^l + 0.01 ω + π^m,

based on the estimates β_w 1 — 0. 16, β_w2 — — 0.08, β_p 1 — 0.04, β_p2 — 0, κ_w — 0.29, and
κp — 0.08 (κ — 1.08).

We clearly see again in these equations the stabilizing role of the dynamic multiplier,
the dominance of investment demand in the determination of real wage influences on
aggregate demand and the multiplier, as well as the negative real rate of interest effect
on changes in goods markets’ activity levels.

In the law of motion describing the evolution of the real wage, we have the expected
positive influence of the rate of employment and the negative influence of the rate of
capacity utilization (that drives the price rate of inflation), as well as the joint working
of the Blanchard and Katz (2000) error correction mechanisms, but only in the wage
dynamics. We know from the estimates of the dw, dp equations that their difference must
contain 0.326dyn as resulting influence of labor productivity growth, but do neglect this
here, since unit wage costs have been detrended by the bandpass filter in the estimation
of the wage and price Phillips curves.

6 Conclusions and outlook

We have considered in this paper an significant extension and modification of the tradi-
tional approach to AS-AD growth dynamics that allows us to avoid dynamical inconsis-
tencies of the traditional Neoclassical synthesis, stage I, and also to overcome empirical
weaknesses of the New Keynesian approach, the Neoclassical synthesis, stage II, that
arise from the assumption of purely forward looking behavior. Conventional wisdom
avoids the stability problems then generated in these model types by just assuming
global asymptotic stability through the adoption of non-predetermined variables and
the application of the so-called jump-variable technique.

This approach of the Rational Expectations School is however much more than just
the consideration of rational expectations, but in fact the assumption of hyperperfect

25

<<   22   23   24   25   26   27   28   >>

More intriguing information