Financial Assets, Debt and Liquidity Crises: A Keynesian Approach by Matthieu Charpe & Carl Chiarella & Peter Flaschel & Willi Semmler

Author:Matthieu Charpe & Carl Chiarella & Peter Flaschel & Willi Semmler
Language: eng
Format: mobi, pdf
Tags: Macroeconomics, Business & Finance, Economics, Business & Investing, Economic History
ISBN: 9781107004931
Publisher: Cambridge University Press
Published: 2011-08-21T18:30:00+00:00

Rose effects

Capacity effect of I

wage

Labour

FISCAL POLICY RULES

inflation

Markets

How dominant is the downward influence? How strong are the repercussions?

How dominant are the supply side dynamics?

Figure 6.1 Advanced traditional disequilibrium growth dynamics: graphical summary. Different

fonts and shading represent the market hierarchies, supply side features, feedback mechanisms and

feedback policy rules

treatment of Phillips curves (PCs), one for the nominal wage and one for the price

level. Such an approach allows the analysis to escape from the narrow perspective of

a unique monetarist type of expectations augmented price inflation labour market PC

which does not really allow for the discussion of wage-price spirals, which is needed in

a full approach to disequilibrium growth where both labour and capital can be over- or

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6.6 Outlook: feedback structures and stability issues

205

under-utilised. Such a view on the working of the wage-price mechanism, which allows

for a sluggish adjustment of both of these nominal magnitudes, will include Rose (1967)

effects in the interaction of the goods and the labour markets, which generally imply

that either wage or price flexibility will lead to instability in the process that is usually

considered as the medium run of macrodynamic model building.

Finally we assume that certain policy feedback rules interact with the dynamics of

the private sector. Such rules are present in the approach investigated in the present

chapter, but are not yet at the centre of interest in the present stage of the investigation.

Figure 6.1 therefore summarises and contrasts the main substructures we have intro-

duced in greater detail in Chiarella et al. (1999a,b) and which we describe on the

intensive form level in this chapter and also investigate further in subsequent chapters.

At the bottom of Figure 6.1 we also see a summary of the main questions that should find

some answers in the course of the investigations of this general approach to disequilib-

rium growth. First, we have the question to what extent the asset markets dominate the

outcome of the real/financial interaction (which, as we shall see, is here still of a very

particular type and thus demands further extensions of the model if the dynamics of

asset prices are to be linked more closely to the stocks supplied and demanded on these

markets). Second, there is the question as to what the various feedback mechanisms

shown add to the real/financial interaction and to what extent they will contribute to

or undermine, when working together, the local stability of the balanced growth solu-

tion(s) of the model. Third, the dynamics of income distribution, as they find expression

in the wage-price spiral, have to be investigated, in particular in their role of shaping

the long-run outcome of this model which has a strictly Keynesian short-run outcome.

Finally, the perspective of our approach is of course to contribute to the analysis of pol-

icy issues which due to the fact that we want to treat medium- and long-run dynamics

as well is more oriented to the treatment of monetary policy rules than to a treatment of

the consequences of isolated fiscal or monetary shocks that occur only once in time.

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