Output, Financial Markets and Growth
University of Technology, School of Finance and Economics Working Paper No. 108
24 Pages Posted: 31 Jan 2006
Date Written: September 2000
In this paper we reconsider a macrodynamic model of Blanchard, which integrates output and stock market dynamics in a fundamental way. We add budget equations (and their implications) to all sectors of the economy, and also capital accumulation and growth (but not yet proper wage-price dynamics) and obtain a model of the real-financial interaction with quite different steady state characteristics as compared to the Blanchard approach. We furthermore allow for somewhat sluggish adjustment of share prices and capital gain expectations in place of perfect substitutes and perfect foresight. This brings our approach closer to completion and also makes it much more involved. Instead of the originally only 2D dynamics we now obtain a 4D dynamical system with two real and two financial variables and specific stability properties. However, by setting certain secondary expressions equal to their trend values, we can regain the mathematical form of the original 2D dynamics of Blanchard type. This form is now based on variables that allow for stationarity, when estimated, that therefore permit to estimate the model to get information about the magnitude of its adjustment speeds, the size of which is crucial for the stability of instability of this dynamical system.
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