Table Of ContentDisequilibrium, Growth
and Labor Market Dynamics
Springer-Verlag Berlin Heidelberg GmbH
Carl Chiarella· Peter Flaschel
Gangolf Groh · Willi Semmler
with contributions by Carsten Koper
Disequilibrium,
Growth and Labor
Market Dynamics
Macro Perspectives
With 73 Figures
and 23 Tables
, Springer
Prof.Dr. CarlChiarella Prof. Dr. Willi Semmler
UniversityofTechnology, Sydney UniversityofBielefeld
School ofFinance and Economics FacultyofEconomics
ao.Box 123 Postfach 100131
Broadway,NSW 2007 33501 Bielefeld
Sydney Germany
Australia
New School University
[email protected]
DepartmentofEconomics
65 Fifth Ave,New York
Prof. Dr. PeterFlaschel
NY 10003
UniversityofBielefeld
USA
FacultyofEconomics
Postfach 100131
33501 Bielefeld
Germany
[email protected]
Dr. GangolfGroh
UniversityofMagdeburg
FacultyofEconomics
Postfach4120
39016 Magdeburg
Germany
ISBN 978-3-642-08443-0 ISBN 978-3-662-04070-6 (eBook)
DOI 10.1007/978-3-662-04070-6
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Disequilibrium,growthandlabormarketdynamics:macroperspectivesI CarlChiarella;
PeterPlaschel;GangolfGroh;WilliSemmler.- Berlin;Heidelberg;NewYork; Barcelona;
HongKong;London;Milan;Paris;Singapore;Tokyo:Springer,2000
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Preface
In this book on disequilibrium, growth and labor market dynamics we take predominantly
a macroeconomic perspective. We present a working model that can easily be varied in
different directions in order to subsume innovations in the literature on macroeconomics,
old and new, and to contribute to important currently discussed macroeconomic issues. Our
working model is set up in a way that there is a close relationship between our presented
dynamic models and modern macro econometric models with disequilibrium both in the
labor and the goods markets. One of our objectives is, therefore, to narrow the gap between
theoretical and applied structural macrodynamic model building.
We hope that the book will be a useful reference for all researchers, academic teachers and
practitioners of macroeconomic and macro econometric model building who are interested
in economic dynamics, independently of whether they use equilibrium or disequilibrium
methods in their own research. We base this hope on the fact that our approach contains
a number of unique features. The emphasis on the identification and analysis of the basic
feedback mechanisms at work in modern macro economies. A detailed study of the partial
as well as integrated dynamic interaction between these feedback mechanisms that consti
tute the interdependence of markets and sectors of the modern macro economy. The rela
tionship between the macroeconomic framework of our working model and the Walrasian,
Non-Walrasian and New-Keynesian reformulations of macroeconomics. The development
of a framework for the analysis of the dynamic structure of modern macro econometric
models. Finally the development of an approach to the theoretical investigations of large
scale macrodynamic models that involves an appropriate blend of a range of analytical,
diagrammatic and numerical tools and concepts. In our view, the primary objective of
macroeconomics is to analyze the aforementioned basic feedback mechanisms and other
types of economic interdependence, be it on the basis of the microfounded approaches
currently prevailing (which however often severely restrict the range of interacting compo
nents) or on the basis of aggregates that are coherently formulated with respect to stock
and flow conditions.
Various material of this book has been presented at different national and international con
ferences and workshops, in particular at meetings of the European Economic Association
and European Econometric Society, the Annual Conferences of the Society for Computa
tional Economics, the Annual Conference of Economists, Australia, the Annual Symposia of
the Society for Nonlinear Dynamics and Econometrics, New York, the Conference of the So
ciety of Economic Dynamics, the International Atlantic Economic Conference, the Annual
Meetings of the 'Verein fiir Socialpolitik', the Workshops on Economics with Heterogeneous
Interacting Agents, Italy, the Viennese Workshop on Optimal Control, Dynamic Games,
Nonlinear Dynamics and Adaptive Systems, the Workshop of the International School of
vi
Economic Research, Siena, the Conference on 'Bifurcations and Chaos in Economic and
Social Systems' in Umea / Sweden, the workshop on Econometric Model Building, New
York, and the Conference on Commerce, Complexity and Evolution at the University of
New South Wales/ Sydney. Parts of the book have also been presented in particular at
seminars at the University of Technology, Sydney, Monash University / Melbourne, the Re
serve Bank of Australia, Sydney, the Free University of Berlin, the Universities of Konstanz,
Bamberg, Mainz, and Bielefeld.
We want to thank the audiences of the above conferences, workshops and seminars and
other scholars, colleagues and friends who have commented on our work at those various
occasions. Thanks go in particular to Richard Day, Reiner Franke, Alfred Greiner, Cars
Hommes, Klaus Jaeger, Stefan Mittnik, Reinhard Neck, Matthias Raith, Carsten Koper,
Ingrid Kubin, Thomas Lux, Alan Powell, Hans Jiirgen Ramser, James Ramsey, Michael
Woodford, and Peiyuan Zhu.
October 1999
Carl Chiarella University of Technology, Sydney, Australia
Peter Flaschel University of Bielefeld, Bielefeld, Germany
Gangolf Groh Otto-Von-Guericke University, Madgeburg, Germany
Willi Semmler University of Bielefeld, Bielefeld, Germany
and New School University, New York, U.S.A
Contents
1 Introduction: Integrated Macrodynamics 1
I An Overview on Foundations and Perspectives
2 Disequilibrium, Growth and Labor Market Dynamics: Foundations 13
2.1 Introduction......................... 13
2.2 Effective demand, employment and nominal adjustments 13
2.2.1 Textbook IS-LM-PC modeling. . . . . . 14
2.2.2 Keynesian IS-LM-PC analysis . . . . . . 15
2.2.3 Reinterpreting the IS-LM-PC dynamics. 18
2.3 Goods market disequilibrium and quantity adjustments 23
2.3.1 An early modeling of the trade cycle 25
2.3.2 Metzlerian inventory dynamics. 33
2.4 Labor market and real wage dynamics 41
2.4.1 The Goodwin growth cycle model. 41
2.4.2 Debt deflation and adverse real wage adjustment 48
2.5 Labor market, two Phillips-curves and nominal adjustments 52
3 Disequilibrium, Growth and Labor Market Dynamics: Synthesis and Per-
spectives 61
3.1 Introduction.................... 61
3.2 The working KMG model of fluctuating growth 62
3.3 Integrated macrodynamics in an open economy 75
3.4 Microfoundations and macromechanisms 86
3.5 Macroeconometric model building . . . . 96
3.5.1 The national accounts of the model 97
3.5.2 The implied CTD growth model. 101
3.5.3 The 18D core dynamics ..... 103
viii
3.5.4 Numerical investigations 106
3.6 Summary and outlook 111
3.7 Appendices .. . 113
3.7.1 Notation. 113
3.7.2 The working model in extensive form .. 114
II The Working Model: Walrasian, Non-Walrasian and New
Keynesian Reformulations
4 Flex-Price Approaches: Exceptional Limit Cases? 123
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . 123
4.2 Sluggish adjustments: An extended KMG reference case 124
4.3 Substitution and endogenous technical change ...... 134
4.4 Market clearing: Classical real and dichotomizing nominal dynamics? 143
4.5 Market clearing: Walrasian reformulation and saddle point stability 153
4.6 KMG equilibrium growth. 168
4.7 Summary ......... 178
4.8 Appendix: Labor market dynamics and classical viability . 180
5 Fix-Price Approaches: Regime Switching Overstated 189
5.1 Introduction . . . . . . . . . . . . . . . . . . 189
5.2 A Non-Walrasian model of monetary growth 191
5.3 From No n-Walrasian to Keynesian modeling of monetary growth . 196
5.4 Regime switching in KMG growth .......... 201
5.4.1 Supply bottlenecks with positive inventories 201
5.4.2 Exhausted inventories and excessive aggregate demand 212
5.4.3 Numerical analysis 216
5.5 Summary ......... 222
5.6 Solow and Stiglitz (1968): An early Non-Walrasian contribution 223
6 Market Imperfections: Basic Integration and Comparison 229
6.1 Introduction . . . . . . . . . . . . . . 229
6.2 A discrete-time KMG reference case. 232
6.3 Imperfect competition: Given income distribution 247
6.3.1 Revising the wage-price module of KMG growth. 250
6.3.2 The 2D stagflation subdynamics: Local analysis . 255
ix
6.3.3 Global characteristics of the 2D case 258
6.3.4 Kinked Phillips curves: 2D analysis . 260
6.3.5 4D and 6D extensions of the 2D stagflation dynamics 265
6.4 Imperfect competition: Adjusting income distribution . 271
6.4.1 Marked up marginal wage costs 272
6.4.2 Profit share targets . 277
6.4.3 Markup adjustments 281
6.5 Summary ....... . . . 283
III The Perspective: Theoretical Aspects of Modern Macro
econometric Model Building
7 Applied Disequilibrium Growth Theory 289
7.1 Introduction ............... . 289
7.2 A general framework for modeling disequilibrium growth 293
7.2.1 The assumed structure of the economy ..... . 293
7.2.2 The structure from the viewpoint of national accounting 297
7.2.3 Aggregate concepts from the system of national accounts 303
7.3 Households 305
7.4 Firms ... 317
7.5 Government and the monetary authority 323
7.6 Quantity and price adjustment. 325
7.7 Asset market dynamics. 330
7.8 The foreign sector ... . 332
7.9 A summing up .... . 334
7.10 Macroeconometric model building of the AS-AD type: A brief comparison 338
7.11 Appendix A: Notation . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 346
7.12 Appendix B: Representing technology by nested CES / CET production
functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 349
8 Intensive Forms and Steady State Calculations 353
8.1 Introduction..................... 353
8.2 The real and the financial structure of the economy 356
8.2.1 The real sector ... 356
8.2.2 The financial sector 358
8.2.3 National accounting 359
