On the stability of a certain Keynes-Metzler-Goodwin monetary growth model

Abstract The article has three aims. The first aim is to develop an improved version of the Keynes-Metzler-Goodwin (the KMG) monetary growth model originally presented and analysed in a series of publications by Carl Chiarella, Peter Flaschel and Willi Semler. The improvement of the model is obtained by modifying some of its equations in a way which ensures that they reflect real macroeconomic dependencies more properly. The equations that have been modified describe final demand expectations, determinants of production decisions, fixed capital accumulation, tax revenues, government budget deficit and money demand. The second aim is to transform the model into an intensive form described by seven non-linear differential equations and determine its unique steady state which shows proportions between variables on the balanced growth path. The third ultimate aim is to present a mathematical proof that the new improved version of the KMG model is locally asymptotically stable.