A Keynesian Dynamic Stochastic Disequilibrium Model

Christian Schoder
Written By SCEPA

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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.

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