Real-Financial Interaction: Implications of Budget Equations and Capital Accumulation

UTS School of Finance and Economics Working Paper No. 127

23 Pages Posted: 21 Jan 2006

See all articles by Carl Chiarella

Carl Chiarella

University of Technology, Sydney - UTS Business School, Finance Discipline Group

Peter Flaschel

Bielefeld University - Department of Business Administration and Economics

Willi Semmler

The New School - Department of Economics; Universitaet Bielefeld; IIASA

Date Written: May 2003

Abstract

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 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 adjustments is sufficiently sluggish, and this even in the case of myopic perfect foresight. In the opposite situation, if stock markets adjustments 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. We indicate for this case how a regime (or phase diagram) switching methodology between activated and tranquil stock market behavior may nevertheless ensure global viability of the dynamics, despite the occurence of shorter of longer episodes of explosive financial acceleration, by assuming that stock markets must return to tranquillity after certain thresholds are passed, where financial acceleration due to high adjustment speeds in the market for equities disappear.

Keywords: real-financial interactions, stability, Hopf-bifurcations, jump-variable methodology, phase diagram switches

JEL Classification: E12, E43, E44

Suggested Citation

Chiarella, Carl and Flaschel, Peter and Semmler, Willi, Real-Financial Interaction: Implications of Budget Equations and Capital Accumulation (May 2003). UTS School of Finance and Economics Working Paper No. 127. Available at SSRN: https://ssrn.com/abstract=877228 or http://dx.doi.org/10.2139/ssrn.877228

Carl Chiarella (Contact Author)

University of Technology, Sydney - UTS Business School, Finance Discipline Group ( email )

PO Box 123
Broadway, NSW 2007
Australia
+61 2 9514 7719 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://www.business.uts.edu.au/finance/

Peter Flaschel

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany

Willi Semmler

The New School - Department of Economics ( email )

65 Fifth Avenue
New York, NY 10003
United States

HOME PAGE: http://www.newschool.edu/nssr/faculty/?id=4e54-6b79-4e41-3d3d

Universitaet Bielefeld ( email )

Universit├Ątsstra├če 25
Bielefeld, NRW
Germany

IIASA ( email )

Schlossplatz 1
Laxenburg/Austria, A-2361
Austria

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
57
Abstract Views
1,006
rank
383,608
PlumX Metrics