chapter  13
The dynamics of “natural” rates of growth and employment
Pages 22

The model, presented in extensive form in the appendix to this chapter, is complete with respect to agents (households, firms and government) and markets (goods, labor and financial assets) all of whose interactions are consistent with respect to budget constraints. In this framework we assume a sluggish adjustment of wages, prices as well as output, the latter however (somewhat simplified) in the tradition of Kaldor (1940) and Tobin (1975).2 The model is described in its economic building blocks in Chiarella and Flaschel (2000a, ch. 7) and is here motivated immediately on the level of its typical intensive form state variables and their laws of motion. From the KT model with its simple formulation of the labor market it inherits as state variables the share of wages u, labor intensity l, real balances m, inflationary expectations π and the rate of output per unit of capital y which is the minimum set of state variables to be employed in the presence of sluggish adjustments of wages, prices, expectations and quantities (output and growth).3