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Numerical Analysis of the Disequilibrium Monetary Growth Model: Secular Stagnation, Slow Convergence, and Cyclical Fluctuations

Ogawa, Shogo and Sasaki, Hiroaki (2020): Numerical Analysis of the Disequilibrium Monetary Growth Model: Secular Stagnation, Slow Convergence, and Cyclical Fluctuations.

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Abstract

This study presents a monetary disequilibrium growth model and conducts numerical simulations to investigate how dynamic paths are affected by the initial conditions and the parameters of expectation formation. The main results are as follows. First, dynamic properties such as stable convergence and cyclical fluctuations depend on the type of expectation formation rather than on the initial regimes. Stable convergence takes an excessively long time when expectation formation is too rational and cyclical fluctuations appear when it is too adaptive. Second, when the economy converges to the steady state (i.e., the Walrasian equilibrium), persistent Keynesian unemployment is likely to appear along the dynamic path. Third, the dynamics of inflation expectation that contain the price dynamics in the feedback loop might play an important role in convergence to the steady state.

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