An Intertemporal Disequilibrium Model of the Income-Accelerator Process

1983| Working Paper No. 748

This paper develops an intertemporal general equilibrium model with optimizing agents which is nearly obeervationally equivalent to Samuelsons (1939) empirically appealing incomeaccelerator framework. Given the flexibility of general equilibrium models, however, observational equivalence results need not be surprising. What distinguishes the framework presented here, is that it retains certain Keynesian attributes of the original Samuelson model. In this regard, the model differs significantly from the recently popular competitive equilibrium business cycle models. In particular, the framework on which the analysis builds is a one sector monetary growth model, modified to incorporate nominal wage inertia. It is in effect an intertemporal version of the choice-theoretic disequilibrium models. It differs from other intertemporal versions primarily in two ways: first, by incorporating a richer description of the investment process and the resulting implications for dynamics; second, by attempting to minimize the exogenous restrictions needed to allow the possibility of temporary non-market clearing. With regard to the latter, only one parameter enters the reduced form coefficients which cannot be attributed to tastes, technology or policy. This parameter reflects the sensitivity of nominal wage inflation to effective demand. Further, it is not present in the system which describes the long run equilibrium.