A Keynesian Dynamic Stochastic Disequilibrium model for business cycle analysis

Abstract

A Dynamic Stochastic Disequilibrium (DSDE) model is proposed for business cycle analysis. Unemployment arises from job rationing due to insufficient aggregate spending. The nominal wage is taken as a policy variable subject to a collective Nash bargaining process between workers and firms with the state of the labor market affecting the relative bargaining power. A precautionary saving motive arising from an uninsurable risk of permanent income loss implies an equilibrium relation between consumption, income and wealth. The DSDE model differs from the corresponding Dynamic Stochastic General Equilibrium (DSGE) model with labor market clearing in important respects: (i) Output is determined from the demand side and not from the supply side; (ii) The steady-state interest rate cannot be interpreted as a natural rate; (iii) It has to be smaller than the rate of economic growth in order for a steady state to exist; (iv) Determinacy of the solution requires the monetary policy response to inflation to be high (low) at low (high) steady-state interest rates; (v) Fighting inflation is stabilizing in the active monetary policy regime but destabilizing in the passive monetary policy regime; (vi) Macroeconomic responses to monetary policy and productivity shocks are similar to those of the DSGE model but give more weight to quantity adjustment and predict the real wage to increase with productivity.

Determinants of gini ratio: a case study of low gini ratio in Madura

“…Keynesian or disequilibrium unemployment develops when the nominal wage lacks the inclination to empty the labor market (Schoder, 2020). A mismatch between the market's supply and demand for labor can lead to unemployment.…”

Regime-Dependent Environmental Tax Multipliers: Evidence from 75 Countries

“…With idle labor, the economy can swiftly respond to demand shocks by adjusting employment. Schoder (2020) provides a detailed review of the macroeconomics of DSDE models. The model features an energy sector which uses carbon as an input.…”

“…While there are various ways to model a carbon tax, the approach proposed by Schoder (2021) has important advantages: Even though derived from first principles, it is very simple and tractable. The energy sector is embedded in a macro framework which performs well empirically despite the absence of typical Dynamic Stochastic General Equilibrium (DSGE) features such as habit formation, variable capital utilization, or constrained monetary policy (Schoder 2017). The transmissions of a carbon and labor taxes are governed by substitution elasticities at various points of the value chain.…”

Modeling the out-of-equilibrium dynamics of bounded rationality and economic constraints

“…Compared to selfish utility maximizers, this corresponds to a broader version of methodological individualism, because the aggregate dynamics cannot be deduced from individual behavior. In many ABM and post-Keynesian models, agents follow a sequence of simple rule-of-thumb behavior instead of an optimization procedure (Gallegati and Richiardi, 2009;Godley and Lavoie, 2012;Schoder, 2020). Lindenberg (2001, p. 248) describes bounded rationality as the "general desire to improve one's condition", and Munier et al (1999, p. 244) discuss "procedural optimizing" as possible modeling strategy.…”