Steindlian Models of Growth and Stagnation

This paper examines Steindl’s original 1952 model and relates it to subsequent stagnationist models. The model is then extended by introducing endogenous changes in the markup and a reformulation of the investment function. These extensions address weaknesses of the simpler models, find support in Steindl’s writing and leave intact some of Steindl’s key results. In a further extension, we add a labour market and analyse the stabilizing influence of a Marxian reserve-army mechanism. The implications of this model for the effects of increased monopolization are largely in line with Steindl’s predictions.Steindl, accumulation, stagnation, markup, monopolization, reserve army of labour.

The J2 Status of Chaos in Period Macroeconomic Models

We reconsider the issue of the (non-)equivalence of period and continuous time analysis in macroeconomic theory and its implications for the existence of chaotic dynamics in empirical macro. We start from the methodological precept that period and continuous time representations of the same macrostructure should give rise to the same qualitative outcome, i.e. in particular, that the results of period analysis should not depend on the length of the period. A simple example where this is fulfilled is given by the Solow growth model, while all chaotic dynamics in period models of dimension less than 3 are in conflict with this precept. We discuss a recent and typical example from the literature, where chaos results from an asymptotically stable continuous-time macroeconomic model when this is reformulated as a discrete-time model with a long period length.Period models, continuous time, (non-)equivalence, chaotic dynamics.

A Proof of Determinacy in the New-Keynesian Sticky Wages and Prices Model

The paper is concerned with determinacy in a version of the New-Keynesian model that integrates imperfect competition and nominal price and wage setting on goods and labour markets. The model is reformulated with an explicit period of arbitrary length and shown to remain well-defined as the period shrinks to zero. The 4×4 constituent matrix of the model?s continuous-time counterpart is mathematically tractable and its determinacy results carry over to the period model at least if the period is sufficiently short. This being understood, it is proved that determinacy is (essentially) ensured if an extended Taylor principle requirement is met. --Determinacy,New-Keynesian wage and price Phillips curves,variable period length,continuous-time limit,Taylor principle

Prosperity and Stagnation in Capitalist Economies

The KMG growth dynamics in Chiarella and Flaschel (2000) assume that wages, prices and quantities adjust sluggishly to disequilibria in labor and goods markets. This paper modifies the KMG model by introducing Steindlian features of capital accumulation and income distribution. The resulting KMGS(teindl) model replaces the neoclassical medium- and long-run features of the originalKMG model by a Steindlian approach to capital accumulation, as developed in a paper by Flaschel and Skott (2005). The model is of dimension 4 or 5, depending on the specification of the labor supply. We prove stability assertions and show that loss of stability always occurs by way of Hopf-bifurcations. When global stability gets lost, a nonlinear form of the Steindlian reserve army mechanism can ensure bounded dynamics. These dynamics are studied numerically and shown to exhibit long phases of prosperity, but also long phases of stagnant growth. JEL Categories: E24, E31, E32.KMGS dynamics, accelerating growth, stagnant growth, normal / adverse income shares adjustment, reserve army mechanisms.

Wage and Price Phillips Curves An empirical analysis of destabilizing wage-price spirals

In this paper we introduce a small Keynesian model of economic growth which is centered around two advanced types of Phillips curves, one for money wages and one for prices, both being augmented by perfect myopic foresight and supplemented by a measure of the medium-term inflationary climate updated in an adaptive fashion. The model contains two potentially destabilizing feedback chains, the so-called Mundell and Rose-effects. We estimate parsimonious and congruent Phillips curves for money wages and prices in the US over the past five decades. Using the parameters of the empirical Phillips curves, we show that the growth path of the private sector of the model economy is likely to be surrounded by centrifugal forces. Convergence to this growth path can be generated in two ways: a Blanchard-Katz-type error-correction mechanism in the money-wage Phillips curve or a modified Taylor rule that is augmented by a term, which transmits increases in the wage share (real unit labor costs) to increases in the nominal rate of interest. Thus the model is characterized by local instability of the wage-price spiral, which however can be tamed by appropriate wage or monetary policies. Our empirical analysis finds the error-correction mechanism being ineffective in both Phillips curves suggesting that the stability of the post-war US macroeconomy originates from the stabilizing role of monetary policy.Phillips curves, Mundell effect, Rose effect, Monetary policy, Taylor Rule, Inflation, Unemployment, Instability

Wage and Price Phillips Curves

In this paper we introduce a small Keynesian model of economic growth which is centered around two advanced types of Phillips curves, one for money wages and one for prices, both being augmented by perfect myopic foresight and supplemented by a measure of the medium-term inflationary climate updated in an adaptive fashion. The model contains two potentially destabilizing feedback chains, the so-called Mundell and Rose-effects. We estimate parsimonious and congruent Phillips curves for money wages and prices in the US over the past five decades. Using the parameters of the empirical Phillips curves, we show that the growth path of the private sector of the model economy is likely to be surrounded by centrifugal forces. Convergence to this growth path can be generated in two ways: a Blanchard-Katz-type error-correction mechanism in the money-wage Phillips curve or a modified Taylor rule that is augmented by a term, which transmits increases in the wage share (real unit labor costs) to increases in the nominal rate of interest. Thus the model is characterized by local instability of the wage-price spiral, which however can be tamed by appropriate wage or monetary policies. Our empirical analysis finds the error-correction mechanism being ineffective in both Phillips curves suggesting that the stability of the post-war US macroeconomy originates from the stabilizing role of monetary policy.Phillips curves, Mundell effect, Rose effect, monetary policy, Taylor rule, inflation, unemployment, instability

On the Determinacy of New Keynesian Models with Staggered Wage and Price Setting

This paper shows that an analytical determinacy analysis of the baseline New Keynesian model with both staggered wages and prices developed by Erceg, Henderson and Levin (2000) is possible despite the high dimensional nature of this model. It is possible if the formulation of the model is translated from discrete to continuous time. Our findings corroborates in an analytical manner Galí's (2008) numerical findings regarding the determinacy frontier and the Taylor principle for this model type, where a generalized Taylor rule that employs a weighted combination of wage and price inflation is used as a measure for the inflation gap.Period models, continuous time, (in)determinacy.

Currency Crises and Monetary Policy in Economies with Partial Dollarisation of Liabilities

The right response to a speculative attack on the domestic currency by monetary authorities in a country with liabilities in US dollars has been a matter of hot debate among academics and policy makers especially after the East Asian Crisis. Using a modified version of the currency crisis model discussed in Proano, Flaschel and Semmler (2005) the authors show that an increase of the domestic interest rate by the central bank as a response to the speculative attack can have serious negative effects on aggregate demand by depressing the investment activity of those domestic firms which are not indebted in foreign currency. The authors demonstrate that in specific situations the standard (IMF supported) increase of the domestic interest rate might not be the best response to a speculative attack on the domestic currency from a medium term point of view.Mundell-Fleming-Tobin model, liability dollarisation, debt-financed investment, financial crisis, currency crisis, deflation.

A baseline model of ’Social Protection’ in open economies of the KMG variety

Flaschel P. A baseline model of ’Social Protection’ in open economies of the KMG variety. Bielefeld; 2020.In this paper we present the modules of a continuous-time model of Keynesian monetary growth, of the variety introduced in Chiarella and Flaschel (2000) and treated in detail in Chiarella, Flaschel and Franke (2005). The model is sufficiently rich with respect to markets, sectors and agents and consistent with respect to budget constraints to capture the important details of actual macro-economies and so to serve as a macro-theoretic basis for larger scale macro models where a variety of Keynesian feedback structures are present. Simulations of this approach provide a persuasive foundation for a basic understanding of the interaction of these various feedback channels known from partial Keynesian reasoning, like the Harrod-Domar theory of the instability of balanced growth, the Goodwin-Rose distributive cycle mechanism, the Dornbusch overshooting exchange rate analysis and the Blanchard analysis of bond and asset markets dynamics. Of primary interest is on this basis the question how the various tax rates, transfer payments and government expenditure parameters of the model can be used to improve the social protection of the sector of worker households, without loosing the efficiency of a well-performing labor market (with its partial Friedmanian supply side aspects), and without neglecting the creation of a sound and sustainable infra-structure” for education, health care and care for the elderly.Contracted project with the International Labour Organization, Project No. 40091442 and working paper of the ILO in Geneva as far as the formal part of the paper is concerned. Thanks go to the ILO for financing this research project and for allowing me to republish it in the Bielefeld Open Access Library

Hedging, Speculation, and Investment in Balance-Sheet Triggered Currency Crises

This paper explores the linkage between corporate risk management strategies, investment, and economic stability in an open economy with a flexible exchange rate regime. Firms use currency futures contracts to manage their exchange rate exposure – caused by balance sheet effects as in Krugman (2000) – and therefore their investments’ sensitivity to currency risk. We find that, depending on whether futures contracts are used for risk reduction (i.e., hedging) or risk taking (i.e., speculation), the implied magnitudes of recessions and booms are decreased or increased. Corporate risk management can therefore substantially affect economic stability on the macrolevel.Mundell-Fleming-Tobin model; foreign-debt financed investment; currency crises; real crises; currency futures; hedging; speculation