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Stability Analysis of a High-Dimensional Macrodynamic Model of Real-Financial Interaction: A Cascade of Matrices Approach

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Author Info
Carl Chiarella () (School of Finance and Economics, University of Technology, Sydney)
Peter Flaschel (Department of Economics, University of Bielefeld)
Reiner Franke
Willi Semmler

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Abstract

This paper analyzes a high-dimensional macrodynamic model of the real-financial interaction. Regarding the financial sector it focuses on the stock market dynamics, whilst for the 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. The integrated dynamics of the model constitute a seven-dimensional system of differential equations, the stability analysis of which is the main contribution of the paper. The analysis proceeds by constructing a cascade of stable matrices and thus demonstrating that the long-run equilibrium is locally stable if certain adjustments are sufficiently sluggish. Large values of some reaction parameters, on the other hand, can destabilize the economy, while a Hopf bifurcation analysis shows the potential for cyclical motion in such circumstances.

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Publisher Info
Paper provided by School of Finance and Economics, University of Technology, Sydney in its series Working Paper Series with number 123.

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Date of creation: 01 Nov 2002
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Handle: RePEc:uts:wpaper:123

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Related research
Keywords: real-financial interaction; higher-order local stability analysis; cascade of stable matrices; tobin's average q; wage-price dynamics; hopf bifurcation;

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Find related papers by JEL classification:
E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Ricardo J. Caballero & John V. Leahy, 1996. "Fixed Costs: The Demise of Marginal q," NBER Working Papers 5508, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Sethi, Rajiv, 1996. "Endogenous regime switching in speculative markets," Structural Change and Economic Dynamics, Elsevier, vol. 7(1), pages 99-118, March. [Downloadable!] (restricted)
  3. Franke, Reiner & Sethi, Rajiv, 1998. "Cautious trend-seeking and complex asset price dynamics," Research in Economics, Elsevier, vol. 52(1), pages 61-79, March. [Downloadable!] (restricted)
  4. Evans, Martin & Wachtel, Paul, 1993. "Inflation Regimes and the," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 475-511, August. [Downloadable!] (restricted)
  5. Chiarella, Carl & Flaschel, Peter & Wells, Graeme, 2003. "The Dynamics Of Keynesian Monetary Growth," Macroeconomic Dynamics, Cambridge University Press, vol. 7(03), pages 473-475, June. [Downloadable!]
  6. Franke, Reiner, 1996. "A Metzlerian model of inventory growth cycles," Structural Change and Economic Dynamics, Elsevier, vol. 7(2), pages 243-262, June. [Downloadable!] (restricted)
  7. Blanchard, Olivier J, 1981. "Output, the Stock Market, and Interest Rates," American Economic Review, American Economic Association, vol. 71(1), pages 132-43, March. [Downloadable!] (restricted)
  8. Carl Chiarella & Peter Flaschel & Willi Semmler, 2001. "Real-Financial Interaction: A Reconsideration of the Blanchard Model with a State-of-Market Dependent Reaction Coefficient," Working Paper Series 111, School of Finance and Economics, University of Technology, Sydney. [Downloadable!]
  9. Alan Kirman, 2006. "Heterogeneity in Economics," Journal of Economic Interaction and Coordination, Springer, vol. 1(1), pages 89-117, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. T. Asada & P. Chen, 2004. "Keynesian Dynamics and the wage price spiral. A baseline disequilibrium approach," Computing in Economics and Finance 2004 262, Society for Computational Economics. [Downloadable!]
    Other versions:
  2. T. Asada & Carl Chiarella & Peter Flaschel, 2003. "Keynes-Metzler-Goodwin Model Building: The Closed Economy," Working Paper Series 124, School of Finance and Economics, University of Technology, Sydney. [Downloadable!]
  3. Carl Chiarella & Peter Flaschel & Reiner Franke & Willi Semmler, 2003. "Output and the Term Structure of Interest Rates: Ways Out of th Jump-Variable Conundrum," Working Paper Series 125, School of Finance and Economics, University of Technology, Sydney. [Downloadable!]
  4. Toichiro Asada & Pu Chen & Carl Chiarella & Peter Flaschel, 2004. "Keynesian Dynamics and the Wage-Price Spiral: A Baseline Disequilibrium Model," Working Paper Series 139, School of Finance and Economics, University of Technology, Sydney. [Downloadable!]
    Other versions:
  5. Carl Chiarella & Peter Flaschel & Willi Semmler, 2003. "Real-Financial Interaction: Implications of Budget Equations and Capital Accumulation," Working Paper Series 127, School of Finance and Economics, University of Technology, Sydney. [Downloadable!]
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