A macrodynamic model of real-financial interaction: Implications of budget equations and capital accumulation

Nova Science Publishers Inc
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Progress in Financial Markets Research, 2012, 1st, pp. 243 - 262
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In this paper, we investigate the real-financial interaction of an approach of Blanchard to stock market and multiplier dynamics from the stock-flow consistency perspective by including the capacity and the financing effect of the investment decision of firms into the model. We thus add budget equations as well as the growth law for the capital stock to the Blanchard dynamics and investigate the implications of these additions for steady state locations and their stability. We show that the steady state solutions of the Blanchard approach are no longer of relevance here, but rather are replaced by a unique interior long-run solution. We demonstrate asymptotic stability with respect to this steady state when stock market adjustment is sufficiently sluggish, and this even in the case of myopic perfect foresight. In the opposite situation, if stock market adjustment is made sufficiently fast, the system loses stability by way of a Hopf bifurcation for increasing adjustment speeds of capital gains expectations and will generate purely explosive behavior shortly thereafter.
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