Output and the Term Structure of Interest Rates: Ways Out of th Jump-Variable Conundrum
AbstractIn this paper we reconsider a model of Blanchard and Fisher which reformulated Keynesian IS-LM analysis from the perspective of a richer array of financial assets, namely short-term and long-term bonds, and thus from the perspective of the term structure of interest rates. The basic change in this extension of the IS-LM approach is that investment demand (and also consumption demand) now depend on the long-term rate of interest in the palce of the short-term rate. This implies that the IS-curve and the LM-curve are no longer situated in the same diagram, but have to be linked via the dynamics of long-term bond prices (in the approach of Blanchard and Fischer based on perfect substitutes, perfect foresight and the jump variable technique), thereby creating one of the links for the real-financial interaction to be investigated, the dynamic multiplier process and thw conventional LM curve representing the other one. Based on this dynamic interaction of real and financial markets we will reflect the outcomes achieved by Blanchard and Fischer from the perspective of imperfect substitutes and mypoic perfect foresight. We derive on this basis alternatives to the conventional jump variable technique and its treatment of unanticipated and anticipated monetary and fiscal policy, which are global in nature and do not depend on well-behaved stable manifolds in an essentially local analysis of saddlepoint instability as in the case for the jump variable technique.
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Bibliographic InfoPaper provided by Finance Discipline Group, UTS Business School, University of Technology, Sydney in its series Working Paper Series with number 125.
Date of creation: 01 Apr 2003
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real-financial interaction; term structure of interest rates; jump variable technique; postulated stability; relaxation oscillations; phase diagram switching;
Find related papers by JEL classification:
- E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-06-02 (All new papers)
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.:
- Chiarella, Carl, 1986. "Perfect foresight models and the dynamic instability problem from a higher viewpoint," Economic Modelling, Elsevier, vol. 3(4), pages 283-292, October.
- Benhabib, Jess & Miyao, Takahiro, 1981. "Some New Results on the Dynamics of the Generalized Tobin Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(3), pages 589-96, October.
- Sargent, Thomas J & Wallace, Neil, 1973. "The Stability of Models of Money and Growth with Perfect Foresight," Econometrica, Econometric Society, vol. 41(6), pages 1043-48, November.
- Carl Chiarella & Peter Flaschel & Reiner Franke & Willi Semmler, 2002. "Stability Analysis of a High-Dimensional Macrodynamic Model of Real-Financial Interaction: A Cascade of Matrices Approach," Working Paper Series 123, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
- 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, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
- Carl Chiarella & Peter Flaschel & Reiner Franke & Willi Semmler, 2001. "Output, Interest and the Stock Market: An Alternative to the Jump Variable Technique," Bulletin of the Czech Econometric Society, The Czech Econometric Society, vol. 8(13).
- Carl Chiarella & Peter Flaschel & Willi Semmler, 2003. "Real-Financial Interaction: Implications of Budget Equations and Capital Accumulation," Working Paper Series 127, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
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