Summary: This paper formulates and empirically estimates a baseline disequilibrium AS-AD model with time series data for the U.S. economy. The model exhibits a Phillips curve, a dynamic IS curve and a Taylor interest rate rule. It is based on sticky wages and prices, perfect foresight of current inflation rates and adaptive expectations concerning the inflation climate in which the economy operates. A version of Okun’s law links capacity utilization to employment. The resulting nonlinear 5D model of real market dynamics overcomes anomalies of the old Neoclassical synthesis and also the rational expectations methodology of the new Neoclassical synthesis. It resembles New Keynesian macroeconomics but permits nonclearing of markets. It exhibits typical Keynesian feedback structures with asymptotic stability (instability) of its steady state for low (high) adjustment speeds. Estimates of the model, for quarterly time series data of the U.S. economy 1965.1–2001.1, are provided and used to study the stability features of the U.S. economy with respect to its various feedback channels. It is found in particular that goods market dynamics are profit-led, and that the dynamics are strongly convergent around the steady state, if monetary policy is sufficiently active; however this feature is lost if the inflationary climate variable or the price inflation rate adjust sufficiently fast. The stabilizing effects of more active interest rate feedback rules or downward wage rigidity are also studied, as well as the economy’s behavior due to faster adjustments. It is found that monetary policy should allow for sufficient steady-state inflation in order to avoid stability problems in areas of the phase space where wages are not flexible in a downward direction.
For the entire collection see [Zbl 1103.91006].