Search

While modeling macroeconomic interactions, post-Keynesians propose rationales to verbally motivate the choice of behavioral equations. This informal approach to microfoundation results in inconsistencies and fuzzy arguments. The rationales for different behavioral rules are mutually inconsistent, require strong and nontransparent assumptions, or refer to highly endogenous variables that are not part of the model. The postulated behavioral rules are invariant to endogenous changes in the microenvironment, whereas the rationales imply that they adjust endogenously. The prevailing assumption of purely backward-looking expectations is neither theoretically nor empirically satisfying. The article concludes that revisiting the issue of microfoundation within the post-Keynesian framework may be a rewarding line of research. Furthermore, post-Keynesians should be open to various microfoundations as long as models feature the core of post-Keynesian theory—the principle of effective demand. [ABSTRACT FROM PUBLISHER]

Dynamic Stochastic Disequilibrium (DSDE) models share the micro-foundations of Dynamic Stochastic General Equilibrium (DSGE) models based on inter-temporal optimization and rational expectations. Yet, it features the principle of effective demand which is at the core of Traditional Post-Keynesian (TPK) models and follows from the perception that the wage inflation is a policy variable rather than a labor-market clearing variable. In order to locate the DSDE model among the traditions of economic thought, the paper compares DSDE first-order conditions of optimal behavior with TPK rule-of-thumb behavior. It further compares the economic propagation of a DSDE model to those of a DSGE and TPK model as well as a Synthetic Neoclassical (SNC) model which features TPK behavioral assumptions and labor-market clearing. We arrive at two core conclusions: First, apart from assumptions regarding expectation formation, orthodox micro-foundation is, to a considerable extent, consistent with the behavioral hypotheses underlying TPK models. Second, the economy characterized by the DSDE model is essentially post-Keynesian rather than neoclassical because it features the principle of effective demand. [ABSTRACT FROM AUTHOR]