Monetary Macrodynamics
by Toichiro Asada (Author), Carl Chiarella (Contributor), Peter Flaschel (Contributor), Reiner Franke (Contributor)

About the Author
Toichiro Asada is a Professor in the Faculty of Economics at Chuo University, Tokyo, Japan.
Carl Chiarella is Professor of Quantitative Finance at the University of Technology, Sydney.
Peter Flaschel is Professor Emeritus at Bielefeld University, Germany.
Reiner Franke is a Lecturer in Economics at Kiel University, Germany.

About this book
This book investigates the interaction of effective goods demand with the wage-price spiral, and the impact of monetary policy on financial and the real markets from a Keynesian perspective. Endogenous business fluctuations are studied in the context of long-run distributive cycles in an advanced, rigorously formulated and quantitative setup. The material is developed by way of self-contained chapters on three levels of generality, an advanced textbook level, a research-oriented applied level and on a third level that shows how the interaction of real with financial markets has to be modelled from a truly integrative Keynesian perspective.
Monetary Macrodynamics shows that the balanced growth path of a capitalist economy is unlikely to be attracting and that the cumulative forces that surround it are controlled in the large by changes in the behavioural factors that drive the wage-price spiral and the financial markets. Such behavioural changes can in fact be observed in actual economies in the interaction of demand-driven business fluctuations with supply-driven wage and price dynamics as they originate from the conflict over income distribution between capital and labour.
The book is a detailed critique of US mainstream macroeconomics and uses rigorous dynamic macro-models of a descriptive and applicable nature. It will be of particular relevance to postgraduate students and researchers interested in disequilibrium processes, real wage feedback channels, financial markets and portfolio choice, financial accelerator mechanisms and monetary policy.

Brief contents
General introduction 1
PART I Conventional AD–AS modeling 13
1 Models of growth, inflation and the real-financial market interaction 15
    1.1 Disintegrated macro model building 15
    1.2 Neoclassical growth theory and the long run 19
        1.2.1 The Solow model 20
        1.2.2 Investment-driven growth 27
    1.3 Phillips curve transition dynamics in the medium run 30
        1.3.1 The model 31
        1.3.2 Local and global dynamic behavior 34
        1.3.3 Accelerating inflation, stagflation and monetary policy 39
        1.3.4 Comments 42
    1.4 Short-run real-financial market interaction 44
        1.4.1 The textbook model 44
        1.4.2 Keynes’ Notes on the trade cycle 46
    1.5 Outlook: towards integrated macrodynamics 50
    References 52
2 Neglected textbook results: IS-LM-PC inflation dynamics 54
    2.1 Feedback channels and stability issues 54
    2.2 Instantaneous real-financial market interaction 60
    2.3 Medium-run IS-LM-PC dynamics 63
    2.4 Multiple steady states and local stability analysis 65
    2.5 Global analysis I: basic phase diagram properties 68
    2.6 Global analysis II: kinked money wage Phillips curves 71
    2.7 Numerical and empirical aspects of IS-LM-PC analysis 76
    2.8 Zero interest rate bounds and full-employment ceilings 83
    2.9 Policy rules for inflation targeting 88
    2.10 Conclusions 93
    References 96
    Appendix: Stability analysis of some textbook models 97
3 Strange AS–AD outcomes: rational expectations inflation theory 112
    3.1 The postulates of Classical economics 112
    3.2 AS dynamics and the quantity theory of money 115
    3.3 Employment cycles in neoclassical monetary growth 116
    3.4 Employment cycles in Classical real growth 122
    3.5 Neoclassical employment dynamics from a Classical perspective 128
    3.6 AD–AS dynamics under myopic perfect foresight 132
    3.7 Appended price dynamics and rational expectations? 140
        3.7.1 Only predetermined variables and nominal instability 140
        3.7.2 Real wage continuity, p-jumps and nominal stability 142
    3.8 A critique of rational expectations 145
    3.9 Outlook: gradual price adjustment processes 149
    References 154
4 Taking Stock: Keynesian Dynamics and the AD–AS Framework 156
    4.1 Introduction 156
    4.2 The AD–AS framework 156
    4.3 Shortcomings 162
    4.4 The New Keynesian detour and the IKDD alternative 166
        4.4.1 Optimization 167
        4.4.2 Stability and rational expectations 169
        4.4.3 Dynamics and expectations in IKDD models 170
    4.5 Post-Keynesian, Structuralist and Neo-Marxian alternatives 172
        4.5.1 A short-run AD–AS model 172
        4.5.2 The medium run: fairness and the ‘natural rate of unemployment’ 175
        4.5.3 The long run: growth, accumulation and technological change 176
    4.6 Conclusion 178
References 179
PART II Matured Keynesian AD–AS model building 183
5 New Keynesian equilibrium vs. Keynesian disequilibrium dynamics: two competing approaches 185
    5.1 Introduction 185
    5.2 New Keynesian (Equilibrium) macrodynamics 187
        5.2.1 The New Keynesian model with staggered wages and prices 187
        5.2.2 Determinacy analysis 188
    5.3 Keynesian (Disequilibrium)AS–AD macrodynamics 196
        5.3.1 A Keynesian (D)AS–AD model 196
        5.3.2 Local stability analysis 200
    5.4 Concluding remarks 204
    References 206
6 Beyond neoclassical syntheses: a baseline DAS–AD model 209
    6.1 Neoclassical syntheses 209
    6.2 Traditional AD–AS with myopic perfect foresight—a reminder 212
    6.3 Matured Keynesian model building: the DAS–AD baseline case 216
    6.4 Local stability analysis: the feedback-guided approach 224
    6.5 Real wage adjustment corrections and nominal interest rate policy rules 229
    6.6 On the role of downward money-wage rigidities 233
    6.7 Conclusion 239
    References 240
    Appendix I: Behavioral foundations 241
    Appendix II: Proof to Section 6.6 243
7 DAS–DAD dynamics: respecification and estimation of the model 253
    7.1 Introduction 253
    7.2 A baseline semistructural macromodel 254
        7.2.1 The goods and labor markets 254
        7.2.2 The wage–price dynamics 255
        7.2.3 Monetary policy 259
    7.3 4D feedback-guided stability analysis 262
    7.4 Econometric analysis 265
        7.4.1 Model estimation 265
    7.5 Eigenvalue stability analysis 273
    7.6 Concluding remarks 276
    References 278
8 Applied DAD–DAS modelling: elaboration and calibration 281
    8.1 Introduction 281
    8.2 Econometric estimation: the point of departure 283
    8.3 Transforming the estimated equations into a closed dynamic system 286
        8.3.1 Output and employment adjustments 286
        8.3.2 Labour productivity as an endogenous variable 288
        8.3.3 Wage and price Phillips curves 290
        8.3.4 Reconsidering the monetary policy rule 292
        8.3.5 The 4D differential equations system 294
        8.3.6 The discrete-time formulation 295
    8.4 An improvement of the numerical coefficients 297
        8.4.1 A rough-and-ready calibration of the inflation climate 297
        8.4.2 Re-estimation of the Phillips curves 300
        8.4.3 Impulse-response functions as a more detailed evaluation criterion 302
        8.4.4 Variabilities in the stochastic economy 305
    8.5 Working with the model 308
        8.5.1 A cutback in workers’ ambitions 308
        8.5.2 Wage and price flexibility: eigenvalue analysis 310
        8.5.3 Wage and price flexibility: variabilities in the stochastic economy 315
    8.6 Conclusion 318
    References 319
9 Sophisticatedly simple expectations in the Phillips curve and optimal monetary policy 320
    9.1 Introduction 320
    9.2 The Rudebusch-Svensson model 323
        9.2.1 Formulation of the model 323
        9.2.2 The Taylor rule in the basic model 326
        9.2.3 The role of measurement errors 329
        9.2.4 Small sample variability 331
    9.3 Sophisticatedly simple expectations and their implications 333
        9.3.1 The concept of the adaptive inflation climate 333
        9.3.2 A comparison of impulse-response functions 336
        9.3.3 Monetary policy in the AIC model 338
        9.3.4 The role of inflation persistence 344
        9.3.5 A note on interest rate smoothing 345
    9.4 Conclusion 348
    References 349
PART III The road ahead: real-financial market interaction from a Keynesian perspective 351
10 The Keynes-Metzler-Goodwin model and Tobinian portfolio choice 353
    10.1 Real disequilibria, portfolio equilibrium and the real-financial markets interaction 353
    10.2 A portfolio approach to KMG growth dynamics 356
        10.2.1 Households 356
        10.2.2 Firms 359
        10.2.3 Fiscal and monetary authorities 363
        10.2.4 Wage–price interactions 364
        10.2.5 Capital markets: gross substitutes and stability 365
        10.2.6 Capital gains: fundamentalists’ and chartists’ expectations 367
    10.3 The model in intensive form 369
    10.4 The comparative statics of the asset markets 376
    10.5 Stability 380
    10.6 The quantitative study of persistent business fluctuations 383
    10.7 Outlook 388
    References 390
    Appendix: Propositions 4–9 (alternative formulations and proofs) 391
Notation 410
Mathematical appendix: some stability theorems 413
Index 421

Pages: 448 pages
Publisher: Routledge; 1 edition (November 10, 2013)
Language: English
ISBN-10: 0415745462
ISBN-13: 978-0415745468