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Dynamic behavior of real and stock markets with a varying degree of interaction

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  • Ahmad Naimzada
  • Marina Pireddu

Abstract

We develop a macroeconomic behavioral model in order to analyze the interactions between real and financial markets. The real subsystem is represented by a simple Keynesian income-expenditure model, while the financial subsystem is represented by an equilibrium stock market with heterogeneous speculators, i.e., chartists and fundamentalists. The interactions between the two markets are modeled in the following way: the aggregate demand depends, among other variables, also on the stock market price, while the fundamental value used by speculators in their decisional process depends on real economic conditions. In our model we introduce a parameter that represents the degree of interaction. With the aid of analytical and numerical tools we show that an increasing degree of interaction between markets tends to locally stabilize the system. This stabilization occurs via a sequence of period-halving bifurcations. Globally, we find that the stabilization process implies multistability, i.e., the coexistence of different kinds of attractors.

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File URL: http://dipeco.economia.unimib.it/repec/pdf/mibwpaper245.pdf
File Function: First version, 2013
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Bibliographic Info

Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 245.

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Length: 18
Date of creation: Jun 2013
Date of revision: Jun 2013
Handle: RePEc:mib:wpaper:245

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Keywords: Interacting markets; bifurcation; stabilization; complex dynamics; multistability;

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References

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  1. Charpe, Matthieu & Flaschel, Peter & Hartmann, Florian & ProaƱo, Christian, 2011. "Stabilizing an unstable economy: Fiscal and monetary policy, stocks, and the term structure of interest rates," Economic Modelling, Elsevier, vol. 28(5), pages 2129-2136, September.
  2. Hommes,Cars, 2013. "Behavioral Rationality and Heterogeneous Expectations in Complex Economic Systems," Cambridge Books, Cambridge University Press, number 9781107019294, October.
  3. Scheffknecht, Lukas & Geiger, Felix, 2011. "A behavioral macroeconomic model with endogenous boom-bust cycles and leverage dynamcis," FZID Discussion Papers 37-2011, University of Hohenheim, Center for Research on Innovation and Services (FZID).
  4. Lengnick, Matthias & Wohltmann, Hans-Werner, 2010. "Agent-based financial markets and New Keynesian macroeconomics: A synthesis," Economics Working Papers 2010,10, Christian-Albrechts-University of Kiel, Department of Economics.
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Cited by:
  1. Ahmad Naimzada & Marina Pireddu, 2014. "Real and financial interacting oscillators: a behavioral macro-model with animal spirits," Working Papers 268, University of Milano-Bicocca, Department of Economics, revised Feb 2014.

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