Keynes-Metzler-Goodwin Model Building: The Closed Economy

UTS School of Finance and Economics Working Paper No. 124

53 Pages Posted: 21 Jan 2006

See all articles by Toichiro Asada

Toichiro Asada

Chuo University

Carl Chiarella

University of Technology, Sydney - UTS Business School, Finance Discipline Group

Peter Flaschel

Bielefeld University - Department of Business Administration and Economics

Date Written: January 2003

Abstract

In the framework of a recently established Keynesian type monetary macro model, the so-called KMG model, we study implications of kinked Phillips curves and alternative monetary policy rules. As alternative monetary policy rules we consider monetary growth targeting and interest rate targeting (the Taylor rule). Our monetary macro model exhibits: asset market clearing, disequilibrium in product and labor markets, sluggish price and quantity adjustments, two Phillips-Curves for wage and price dynamics, and a combination of medium-run adaptive and short-run forward looking expectations. Simulations of the model with our estimated parameters reveal global instability of its steady state. We show that monetary policy can stabilize the dynamics to some extent and that, in addition, an institutionally given kink in the money wage Phillips-Curve (downwardly rigid wages) represents a powerful mechanism for obtaining bounded, more or less irregular fluctuations in the place of purely explosive ones. The resulting fluctuations can be reduced in size by choosing the parameters of monetary policy within a certain corridor, the exact position of which may however be rather uncertain.

Keywords: KMG dynamics, feedback channels, instability, monetary policy, wage floors, fluctuating growth, complex dynamics

Suggested Citation

Asada, Toichiro and Chiarella, Carl and Flaschel, Peter, Keynes-Metzler-Goodwin Model Building: The Closed Economy (January 2003). UTS School of Finance and Economics Working Paper No. 124, Available at SSRN: https://ssrn.com/abstract=877223 or http://dx.doi.org/10.2139/ssrn.877223

Toichiro Asada

Chuo University ( email )

2nd floor Blg 4 Tampa Campus
742-1 Higashinakano, Hachioji
Tokyo 192-03
Japan

Carl Chiarella (Contact Author)

University of Technology, Sydney - UTS Business School, Finance Discipline Group ( email )

PO Box 123
Broadway, NSW 2007
Australia
+61 2 9514 7719 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://www.business.uts.edu.au/finance/

Peter Flaschel

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany

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