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Department of Economics, WU (Wirtschaftsuniversität Wien) Working papers, Department of Economics, WU (Wirtschaftsuniversität Wien)

No 63:
The Stability of Full Employment. A Reconstruction of Chapter 19-Keynesianism

Hansjoerg Klausinger ()

Abstract: In the vein of chapter 19 of Keynes's "General Theory" the following study investigates the dynamic properties of the traditional Keynesian model of the neoclassical synthesis. The dynamics (stability vs. instability, monotonic vs. oscillatory adjustment) is examined - in the absence of active stabilisation policy, that is assuming, in particular, monetary policy to follow Friedman's constant money growth-rule - by appending a wage Phillips curve (with inflationary expectations) and adaptive expectations (with rational expectations as a limiting case) to the static model. Furthermore two regimes are distinguished: on the one hand the "flexible- interest-rate-regime" where the nominal interest rate is free to move and on the other hand the "zero-interest- rate-regime" (similar to the Keynesian "liquidity trap") where the non-negativity restriction on the nominal interest rate becomes binding. Some of the conclusions are (i) that although possibly stable within the flexible- interest-regime the system as a whole might exhibit corridor stability", (ii) that wage flexibility can be (and that the inclusion of inflationary expectations into the Phillips curve certainly is) destabilising, and (iii) that increasing the rate of steady-state inflation makes it "more probable" that full-employment equilibrium isstable.

April 1999

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