Price Flexibility and Instability in a Macrodynamic Model with a Debt Effect

In this paper, we investigate the impact of price flexibility on macroeconomic instability using as our analytical framework a macrodynamic model with a Fisher debt effect. We introduce the expectations-augmented Phillips curve and the adaptive expectations hypothesis into a macrodynamic model with a Fisher debt effect, as developed by Asada (2001). We demonstrate analytically that both of the increase of the speed of price adjustments and the increase of the speed of expectations adaptation contribute to destabilizing rather than stabilizing the economy, and we also show that at the intermediate ranges of the parameter values, cyclical fluctuations occur by means of the Hopf bifurcation theorem. We also present some numerical examples which support our analytical results