We extend the general disequilibrium model of Malinvaud (1980) by using dual labor market theory. By considering two tiers of workers, we find that while the duality of the labor market expands an equilibrium regime in the short term, it does not always keep an equilibrium in the medium term. In the medium term, the business cycle converges toward a disequilibrium regime unless the goods market is potentially in equilibrium. Employment and wages at the steady state are affected by the size of the government expenditure, and the stability of wage bargaining is only a sufficient condition of the local stability of our dynamic system. Therefore, involuntary unemployment can be remedied only when goods demand is sufficiently large.

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This study presents a monetary disequilibrium growth model and conducts numerical simulations to investigate how dynamic paths are affected by the initial conditions and the parameters of expectation formation. The main results are as follows. First, dynamic properties such as stable convergence and cyclical fluctuations depend on the type of expectation formation rather than on the initial regimes. Stable convergence takes an excessively long time when expectation formation is too rational and cyclical fluctuations appear when it is too adaptive. Second, when the economy converges to the steady state (i.e., the Walrasian equilibrium), persistent Keynesian unemployment is likely to appear along the dynamic path. Third, the dynamics of inflation expectation that contain the price dynamics in the feedback loop might play an important role in convergence to the steady state.

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