Demand Driven Goodwin Growth Cycles with a Three-Regimes Wage Phillips Curve

We introduce the results of a non-parametric estimate of the wage-Phillips Curve into a simplified version of the model by Flaschel and Krolzig (2006). The resulting non-linearity in the wage inflation-employment relation translates into a non-linearity in the reduced form of the model, namely the wage-price spiral. A dynamical analysis is then provided, both in wage-led and profit-led effective demand regimes. In a profitled economy, shown to be the empirically relevant case in the case of the US economy, there are 2 stable equilibria of Goodwin (1967) growth cycle type, identified as a stable depression and a stable boom. Both steady states are surrounded by trajectories that cycle around their basins of attraction if the economy remains viable in the economic part of the phase space. The obtained type of growth fluctuations can be verified by a long phase cycle estimation for the US economy using a method developed by Kauermann, Teuber and Flaschel (2008). ———————