Macroeconomic fluctuations in a New Keynesian disequilibrium model

The global financial crisis that has struck in 2008 and the ensuing global recession of 2009–2012 have led to a renewed interest in macroeconomic adjustment and macroeconomic management. At a paradigmatic level, standard approaches—be they more of a neo-classical or Keynesian nature—appear to be inadequate to explain the complete patterns and persistence of fluctuations seen during the crisis. Even the recent generation of New Keynesian [including the s.c. dynamic stochastic general equilibrium (DSGE)] models appears to be able to deliver only partially adequate explanations for the observed adjustments as a result of the financial crisis. At the policy level, unconventional monetary and fiscal policy measures, like the ultra-loose quantitative easing in the USA and the large fiscal stringency plans in Europe, appeared to not have had the desired effects and are widely held to have inadequate policy responses. Abstract This study extends the current New Keynesian modeling framework by changing one crucial aspect: it replaces the general equilibrium assumption by the arguably more realistic assumption of macroeconomic disequilibrium. As a result, more complex and less smooth macroeconomic adjustment dynamics result, as it is not necessary to assume that goods and labor markets continuously clear. The disequilibrium dynamics in the form of regime-dependent output-, employment-, priceand wage fluctuations complicate the decision making problems faced by the fiscal and monetary policy makers substantially. In particular, the possibility of (multiple) regime switches implies the need for deeper analysis and careful monitoring of the disequilibrium mechanisms and dynamics when designing and implementing monetary and fiscal policies.