Reconstructing Keynesian
Macroeconomics Volume 2
This book represents the second of three volumes offering a complete reinterpretation
and restructuring of Keynesian macroeconomics and a detailed investigation
of the disequilibrium adjustment processes characterizing the financial, the goods
and the labor markets and their interaction.
In this second volume the authors present a detailed analysis and comparison
of two competing types of approaches to Keynesian macroeconomics, one that
integrates goods, labor and financial markets, and another from the perspective of
a conventional type of labor market analysis or interest rate policy of the central
bank. The authors employ rigorous dynamic macro-models of a descriptive and
applicable nature, which will be of interest to all macroeconomists who use formal
model building in their investigations.
The research in this book with its focus on Keynesian propagation mechanisms
provides a unique alternative to the black-box shock-absorber approaches
that dominate modern macroeconomics. The main conclusion of the work is that
policy-makers need to reconsider Keynesian ideas, but in the modern form in
which they are expressed in this volume.
Reconstructing Keynesian Macroeconomics, Volume 2 will be of interest to
students and researchers who want to look at alternatives to the mainstream macrodynamics
that emerged from the monetarist critique of Keynesianism. This book
will also engage central bankers and macroeconomic policy-makers.
Carl Chiarella is Professor of Quantitative Finance at the University of Technology,
Sydney, Australia.
Peter Flaschel is Professor of Economics at Bielefeld University, Germany.
Willi Semmler is Professor of Economics at The New School for Social Research,
New York, USA.

Content
PART I
Competing approaches to Keynesian macroeconomics 1
1 Representative households or principal-agent capitalism? 3
1.1 Introduction 3
1.2 The role and scope of microfoundations 3
1.3 Representative agent macrodynamics 5
1.4 Principal/agent capitalism and the distribution of
income and wealth 9
1.5 Conclusions 14
2 The two-class Pasinetti model from a neoclassical perspective 16
2.1 Introduction 16
2.2 The model 17
2.3 Discussion of the model 21
2.4 Conclusions 25
Appendix: proofs of propositions 26
3 Expectations and the (un)importance of the real-wage
feedback channel 29
3.1 Introduction 29
3.2 The limitations of perfectly synchronized period analysis 31
3.3 New Keynesian macrodynamics 33
3.4 Matured Keynesian macrodynamics 41
3.5 Real wage channel dominance 45
3.6 Conclusions 50


PART II
Supply dynamics, demand-driven inflation and the
distributive cycle 53
4 Viability and corridor stability in Keynesian
supply driven growth 55
4.1 Introduction 55
4.2 A Keynesian model of supply-driven growth 56
4.3 Global viability, corridor stability and
persistent business fluctuations 60
4.4 Sluggish wage and price adjustment 65
4.5 Conclusions 72
5 Wicksellian inflation pressure in Keynesian models of
monetary growth 73
5.1 Introduction 73
5.2 A general prototype model of Keynes–Wicksell type 74
5.3 The laws of motion of the model 80
5.4 The Goodwin (1967) growth cycle case 83
5.5 Rose (1967) employment cycle extension 88
5.6 Monetary growth cycles: a point of departure 96
5.7 Expectations and the pure monetary cycle 100
5.8 The real and the monetary cycle in interaction 108
5.9 Conclusions 110
6 Interacting two-country business fluctuations 113
6.1 Introduction 113
6.2 Two interacting Keynes–Wicksell–Goodwin economies 115
6.3 The core 10D KWG growth dynamics 123
6.4 Steady-state and β-stability analysis 129
6.5 Numerical investigation of the KWG dynamics 140
6.6 Conclusions 153
PART III
The semistructural aggregate demand–aggregate
supply model: theory and evidence 155
7 Distributive cycles, business fluctuations and the
wage-led/profit-led debate 157
7.1 Introduction 157
7.2 Theoretical considerations and stylized facts 158
7.3 A dynamical (dis)equilibrium AD–AS model 166

7.4 Wage- and profit-led goods market dynamics and
macroeconomic stability 171
7.5 Conclusions 175
Appendix: local stability analysis of the model 176
8 DAD–DAS: estimated convergence and the emergence of
“complex dynamics” 179
8.1 Introduction 179
8.2 Baseline DAD–DAS macrodynamics 180
8.3 Simulating an estimated version of the model 184
8.4 Analyzing the estimated version of the model 192
8.5 Midrange downward money wage rigidity 196
8.6 Wage-led regimes, rising adjustment speeds and the
emergence of complex dynamics 200
8.7 Conclusions 205
9 International linkages in a Keynesian two-country model 206
9.1 Introduction 207
9.2 The baseline open-economy framework 208
9.3 The two-country framework: estimation and evaluation 219
9.4 Eigenvalue-based stability analysis 232
9.5 Conclusions 239
PART IV
The structural Keynes–Metzler–Goodwinmodel 241
10 Integrating macromodels of employment, price and
inventory dynamics 243
10.1 Introduction 243
10.2 A complete Keynesian model of monetary growth 245
10.3 The implied 6D dynamics 248
10.4 Three prototype “subdynamics” 250
10.5 Dynamic properties of the integrated
Rose–Tobin–Metzler dynamics 255
10.6 The case of no nominal wage deflation 260
10.7 Conclusions 266
11 Calibration of an unobservable inflation climate 275
11.1 Introduction 275
11.2 Overview of modeling approach and methodology 276
11.3 Formulation of the AIC module 278
11.4 Fitting model-generated inflation to actual inflation 283

11.5 A sensitivity analysis 291
11.6 Additional criteria for the numerical coefficients 297
11.7 Conclusions 302
12 A macroeconometric framework for the analysis of monetary
policy 304
12.1 Introduction 304
12.2 Adjustment mechanisms and feedback dynamics 305
12.3 A monetary macrodynamic model 309
12.4 The dynamics of the private sector under alternative
monetary policy rules 316
12.5 Estimation of the model parameters 321
12.6 Evaluating the macroeconometric model and the
monetary policy rules 325
12.7 Conclusions 335
PART V
Extensions 337
13 The dynamics of “natural” rates of growth and employment 339
13.1 Introduction 339
13.2 The KT model with endogenous “natural”
growth and employment 340
13.3 Stability analysis of the 6D core subdynamics 345
13.4 Hysteresis effects in “natural” employment and/or growth 346
13.5 Some numerical simulations 349
Appendix: the model in extensive form 358
14 High-order disequilibrium growth dynamics 361
14.1 Introduction 361
14.2 Disequilibrium growth in small open economies 362
14.3 Partial feedback chains and stability issues 367
14.4 Relaxation oscillations in the market for foreign exchange 371
14.5 Adding sluggish trade balance adjustments 375
14.6 Kinked Phillips curves 376
14.7 Period-doubling routes to chaos 379
14.8 Conclusions 381
15 AD–AS disequilibrium dynamics and endogenous growth 388
15.1 Introduction 388
15.2 AD–AS disequilibrium growth: exogenous technical change 389
15.3 The dynamics of the private sector 394

15.4 Endogenous technical change 397
15.5 Conclusions 400
PART VI
The road ahead: financial markets 401
16 Stabilizing an unstable economy and the choice of policy
measures 403
16.1 Introduction 403
16.2 Asset markets and Keynesian business cycles:
a portfolio approach 404
16.3 Dampening unstable business cycles 420
16.4 An applicable model of the real-financial disequilibria
interaction: a next step 430
16.5 Outlook: toward a dynamic stochastic general
disequilibrium model 434
Appendix: derivation of the model in intensive form 435
Notes 438
Bibliography 457
Index 468