Chapter

The Macrodynamics of Capitalism

pp 267-304

Keynesian AD-AS, Quo Vadis?

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In this chapter,1 we begin to make a big step forward in the evolution of Keynesian AD-AS analysis and present on the basis of Chiarella and Flaschel (2000), Chiarella, Flaschel, and Franke (2005), and related later work a disequilibrium AD-AS framework, which incorporates progress we have made with respect to the AS-side of the models considered in Part II of the book, the wage-price spiral of the model as we would like to call it now. This wage-price spiral, which is operating within a certain inflationary climate here, is combined in the following with a reduced form of a dynamic IS-equation,2 Okun's law in place of a neoclassical production function, and finally a Taylor interest rate policy rule in the place of the LM-curve we have employed so far.We will consider the stability properties of this model type for arbitrary as well as estimated parameter values and will simulate the resulting dynamics numerically. The outcome of this investigation will be that the distributive growth cycle approach of Goodwin (1967), we have considered in detail in Part I of the book, is an integral part of such matured AD-AS modeling, which therefore in fact provides a synthesis of the Keynesian demand cycle with a Goodwinian distributive cycle that we have considered in Chaps. 4 and 5.

Moreover, we also compare this matured Keynesian AD-AS dynamics with the now fashionable New Keynesian approach to macrodynamics (here with both staggered wages and prices) and will see that the two model types have formally seen much in common, but differ radically with respect to their implications and the theory of the business cycle they imply. In place of the radical break with the old neoclassical synthesis that is characteristic for the New Keynesian approach (the new neoclassical synthesis), where the IS curve is basically of a Walrasian type, we provide with our disequilibrium AD-AS model an approach that can be considered as a continuation of the old neoclassical synthesis, yet one that avoids the internal inconsistencies that plagued this synthesis (see Chaps. 6 and 7) and that is based on gradual adjustment processes throughout, in place of the assumption of instantaneous market clearing and a perfectly flexible price level on the market for goods as it was assumed in the old neoclassical synthesis we have investigated in detail in the preceding chapters.