Toichiro Asada

Exchange Rate Volatility

In chapter 2 we have considered a monetary model with completely flexible prices and in chapter 3 contrasted this model type with a fixed price model where quantities rather than prices adjusted in order to clear the markets for the domestically produced and the foreign good. The flexprice approach may be considered the earliest in the study of international trade and balance of payments adjustments, while the Keynesian international multiplier analysis was of course only developed after the appearance of Keynes ‘General Theory’ in 1936 and in particular after World War II. The monetary model had a brief renaissance in the early 1970s when the Bretton Woods system came to an end. It was supposed to provide an alternative to the prevailing fixprice macrotheory of Mundell-Fleming type and proposed the establishment of a system of flexible exchange rates. Yet, exchange rates proved to be much more volatile after the breakdown of the Bretton Woods system in 1973 than was predicted by the monetary model. Confronted with such findings the immediate success of another model type, the Dornbusch (1976) model of sticky, but not fixed prices and flexible, in fact too volatile exchange rates in an environment of high capital mobility, can easily be understood.1 The seminal Dornbusch (1976) model2 combines stock and flow equilibria on the asset markets (money, domestic and foreign bonds respectively) with sluggishly adjusting prices on the market for goods and in later extensions also on the market for labor. Money supply shocks thereby enforce overreaction of the domestic interest rate and as a consequence also of the exchange rate, with respect to their new steady state values, and only after some time are eliminated by subsequent convergence to their (new) steady state values. In appropriately revised form the Dornbusch approach can be viewed to be composed of short-run Mundell-Fleming elements, a new type of exchange rate dynamics, and long-run Classical features (neutrality of money and the relative form of the PPP). It therefore synthesizes to some extent the three preceding chapters of this part of the book by providing an IS-LM-PC approach to the dynamics of exchange rates and expectations of exchange rate depreciation or appreciation with a Classical long-run outlook.

Keynesian dynamics and the wage–price spiral: A baseline disequilibrium model

We reformulate and extend the standard AS-AD growth model of the Neoclassical Synthesis (stage I) with its traditional microfoundations. The model retains an LM curve in the place of a Taylor interest rate rule, exhibits sticky wages as well as sticky prices, myopic perfect foresight of current inflation rates and adaptively formed medium-run expectations concerning the investment and the inflation climate in which the economy is operating. The resulting nonlinear 5D model of labor and goods market disequilibrium dynamics avoids the striking anomalies of the standard AS-AD model of the Neoclassical synthesis (stage I). It exhibits instead Keynesian feedback dynamics proper with, in particular, asymptotic stability of its unique interior steady state for low adjustment speeds and with cyclical loss of stability ? by way of Hopf bifurcations ? when some adjustment speeds are made suciently large, eventually leading to purely explosive dynamics. In such cases, downward money wage rigidity serves to make the overall dynamics bounded and thus viable. We thus obtain and analyze a baseline D(isequilibrium)AS-AD model characterised by Keynesian feedback channels with a rich set of stability/instability features as the sources of the business cycle. The outcomes of the model stand in stark contrast to those of the currently fashionable baseline model of the New Keynesian alternative (the Neoclassical Synthesis, stage II) that we suggest is more limited in scope.

Coefficient criterion for four-dimensional Hopf bifurcations: a complete mathematical characterization and applications to economic dynamics

Abstract In this paper, we present a complete mathematical characterization of a coefficient criterion for four-dimensional Hopf bifurcations. Then, we apply our criterion to two typical models of economic dynamics. We consider the two-region business cycle model by Puu [Nonlinear economic dynamics, Springer-Verlag, Berlin, 1997] and the dynamic optimization model by Dockner and Feichtinger [J. Econom. 53 (1991) 31]. These applications reveal that our criterion is operative and useful in analyzing the qualitative properties of general four-dimensional dynamic economic models with continuous time.

Kaldorian dynamics in an open economy

In this paper, we formulate a Kaldorian business-cycle model in a small open economy. We consider the possibility of capital mobility, and both the system of fixed exchange rates and that of flexible exchange rates are studied. We investigate how changes of the parameter which represents the “degree of capital mobility” affect the dynamic characteristics of the model. Some numerical simulations are performed based on the analytical model.

Stability, instability and complex behavior in macrodynamic models with policy lag

We construct simple macrodynamic models with policy lag by means of mixed difference and differential equations, and study how lags in policy response affect the macroeconomic (in)stability. Local dynamics of the prototype model are studied analytically, and the global dynamics of the prototype and the extended models are studied by means of numerical simulations. We show that the government can stabilize the intrinsically unstable economy if the policy lag is sufficiently short, but the system becomes locally unstable when the policy lag is too long. We also show the existence of cycles and complex behavior in some range of the policy lag.

Stabilizing an Unstable Economy: On the Choice of Proper Policy Measures

Currently, many monetary and fiscal policy measures are aimed at preventing the financial market meltdown that started in the US subprime sector and has spread worldwide as a great recession. Although some slow recovery appears to be on the horizon, it is worthwhile exploring the fragility and potentially destabilizing feedbacks of advanced macroeconomies in the context of Keynesian macro models. Fragilities and destabilizing feedback mechanisms are known to be potential features of all markets — the product markets, the labor market, and the financial markets. In this paper we in particular focus on the financial market. We use a Tobin-like macroeconomic portfolio approach, and the interaction of heterogeneous agents on the financial market to characterize the potential for financial market instability. Though the study of the latter has been undertaken in many partial models, we focus here on the interconnectedness of all three markets. Furthermore, we study the potential that labor market, fiscal and monetary policies have to stabilize unstable macroeconomies. Besides other stabilizing policies we in particular propose a countercyclical monetary policy that sells assets in the boom and purchases assets in recessions. Modern stability analysis is brought to bear to demonstrate the stabilizing effects of those suggested policies.

A Keynes-Goodwin model of the business cycle

Abstract The paper puts forward a dynamic IS-LM model in four state variables representing real balances, inflation, income distribution, and a so-called state of confidence. Local (in)stability is characterized by (high) low interest elasticities of money demand. Also a Hopf bifurcation can be shown to exist. Freezing inflation and distribution makes a mathematical analysis of the main stability mechanisms in the outer regions possible. The global dynamics of the full system is studied by means of numerical simulations. It gives rise to unique and stable limit cycles. Lastly, a sensitivity analysis inquires into the impact of parameter changes on the main cycle features.

Nonlinear Dynamics of Debt and Capital: A Post-Keynesian Analysis

We reconsider the dynamic theory of debt and capital from a post- Keynesian perspective. First, we present a microeconomic model of the debt effect on investment activity which is based on the “principle of increasing risk” in the manner of Kalecki. Then a simple macrodynamic model of debt and capital accumulation, which produces the “Minsky cycle,” is developed. Finally, we briefly discuss the macroeconomic implications of the instability of a flexprice economy with a debt effect.

On a mixed competitive-monopolistic macrodynamic model in a monetary economy

In this paper we reconsider the dynamic stability of the mixed competitive-monopolistic system in an analytical framework of the macroeconomic growth model in a monetary economy. We construct a simple monetary growth model in the so-called “Keynes-Wicksell” tradition and investigate how the “degree of competition” affects the dynamic stability of the system. Our analysis reveals the destabilizing rather than the stabilizing forces of the monopolistic system in amonetary economy contrary to the usual analyses. We also show that the system produces the purely cyclical behavior at some intermediate degrees of competition by using the Hopf-Bifurcation theorem.

Chapter 16 Inflation Targeting Policy in a Dynamic Keynesian Model with Debt Accumulation: A Japanese Perspective

Abstract In this paper, we investigate the macroeconomic impact of the inflation targeting policy by using the analytical framework of a dynamic Keynesian model with debt accumulation. We show that the monetary authority can stabilize an unstable economy by carrying out the sufficiently credible inflation targeting policy even in case of the liquidity trap, as long as the destabilizing Fisher debt effect is not extremely strong. We also show the existence of the cyclical fluctuation at some range of the parameter values by using the Hopf bifurcation theorem, and we provide some numerical examples which support our analysis.