Abstract:
We reformulate and extend the standard AS-AD growth model of the Neoclassical
Synthesis (stage I) with its traditional microfoundations. The model still has
an LM curve in the place of a Taylor interest rate rule, exhibits sticky wages as well
as sticky prices, myopic perfect foresight of current inflation rates and adaptively
formed medium-run expectations concerning the investment and the inflation elimate
in which the economy is operating. The resulting nonlinear 5D model of
labor and goods market disequilibrium dynamics avoids striking anomalies of the
standard AS-AD model of the Neoclassical synthesis (stage I). It exhibits instead
Keynesian feedback dynamics proper with in particular asymptotic stability of its
unique interior steady state for low adjustment speeds and with cyclical loss of
stability - by way of Hopf bifurcations - when some adjustment speeds are made
sufficiently large, even leading to purely explosive dynamics soon thereafter. In
such cases, downward money wage rigidity is of use to make the overall dynamics
bounded and thus viable.
In this way we obtain and analyze a baseline DAS-AD model with Keynesian
feedback channels with a rich set. of stability features as sources of the business
cycle. These outcomes of the model stand in stark contrast to those of the currently
fashionable New Keynesian alternative (the Neoclassical Synthesis, stage II) that
we suggest is much more limited in scope.
