Real-Financial Interaction: Integrating Supply Side Wage-Price Dynamics and the Stock Market

U. of Technology, Sydney Finance and Economics Working Paper No. 112

29 Pages Posted: 31 Jul 2010

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

Reiner Franke

Vienna University of Technology

Willi Semmler

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

Date Written: September 2001

Abstract

The paper put forward a macrodynamic model of the real-financial interaction. Regarding the financial sector it focuses on the stock market dynamics, for real sector it details goods market disequilibrium and two Phillips curves for prices as well as wages. The central link between the two sectors is constituted by Tobin's (average) q. After highlighting the main feedback mechanisms in the real and financial subdynamics, the long-run equilibrium of the integrated 7th-order dynamic system is shown to be locally stable if certain adjustments are sufficiently sluggish, while large values of some reaction parameters can destabilize the economy. Lastly, the analysis reveals the potential for cyclical motion.

Keywords: Real-financial interaction, Tobin's average q, wage-price dynamics, higher-order local stability analysis, Hopf bifuraction

JEL Classification: E12

Suggested Citation

Chiarella, Carl and Flaschel, Peter and Franke, Reiner and Semmler, Willi, Real-Financial Interaction: Integrating Supply Side Wage-Price Dynamics and the Stock Market (September 2001). U. of Technology, Sydney Finance and Economics Working Paper No. 112. Available at SSRN: https://ssrn.com/abstract=880164 or http://dx.doi.org/10.2139/ssrn.880164

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

Reiner Franke

Vienna University of Technology ( email )

Wien 1040
Austria

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

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