A Keynesian Dynamic Stochastic Labor-Market Disequilibrium model for business cycle analysis

A Dynamic Stochastic Labor-Market Disequilibrium (DSLMD) model is proposed for Keynesian business cycle analysis. It shares the type of micro-foundation known from neoclassical Dynamic Stochastic General Equilibrium (DSGE) models but characterizes economic mechanisms consistent with Traditional Post-Keynesian (TPK) models. Wage inflation is perceived as a non-market-clearing policy variable which may be subject to a collective Nash bargaining process with the state of the labor market affecting the relative bargaining power. The core insights are twofold: First, apart from assumptions regarding expectation formation, the DSGE-type of micro-foundation is, to a considerable extent, consistent with the behavioral hypotheses underlying TPK models. Second, the economy characterized by the DSLMD model is post-Keynesian rather than neoclassical.