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Output, stock markets and macro-policy measures in a Keynesian portfolio model

Author

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  • Toichiro Asada

    (Department of Economics, Chuo University, Tokyo, Japan)

  • Matthieu Charpe

    (International Labor Organisation, Genéve, Switzerland)

  • Peter Flaschel

    () (Department of Business Administration and Economics, Bielefeld University, Bielefeld, Germany)

  • Christopher Malikane

    (School of Economic and Business Sciences, University of the Witwatersrand Johannesburg, South Africa)

  • Tarik Mouakil

    (Centre for Financial Analysis and Policy, University of Cambridge, Cambridge, United Kingdom)

  • Christian R. Proaño

    (The New School for Social Research, New York, and Macroeconomic Policy Institute (IMK), Düsseldorf, Germany)

Abstract

We present a simple macrodynamic model of the real-financial markets inter action with a dynamic multiplier representing the goods market and a structured portfolio choice between money holdings and equities. This is contrasted with Blanchard’s (1981) alternative approach, where interest-bearing bonds and equities are perfect substitutes and are subject to myopic perfect foresight, with the result that the usual saddle-point dynamics is established, and where therefore the jump-variable technique of the rational expectations approach is needed in order to tame the explosive nature of the model by assumption. We consider this latter representation a very virtual one in contrast to our descriptive treatment of the interaction of the real with the financial markets.Our implied dynamical system has three dimensions: output, share prices and capital gains expectations. We show that this model exhibits a financial accelerator mechanism that endangers the stability of its stationary solution, at least when it becomes sufficiently strong. Furthermore, we show that this type of instability can definitely be overcome if actual capital gains are taxed to a sufficient degree. This tax policy is therefore effective as compared to an interest rate policy of Taylor type, showing that monetary policy may not impact the markets for risky financial assets, unless it is interpreted as state of confidence for the current situation of the economy and may therefore be fairly overrated in the current macrodynamic literature. By contrast, all policy measures that stabilise the profit rate of the economy may add to the stability implications of the assumed Asada et al. (2010) type tax on capital gains.

Suggested Citation

  • Toichiro Asada & Matthieu Charpe & Peter Flaschel & Christopher Malikane & Tarik Mouakil & Christian R. Proaño, 2011. "Output, stock markets and macro-policy measures in a Keynesian portfolio model," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 8(2), pages 341-360.
  • Handle: RePEc:elg:ejeepi:v:8:y:2011:i:1:p341-360
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    References listed on IDEAS

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    1. Lilia Costabile, 2010. "The International Circuit of Key Currencies and the Global Crisis: Is there Scope for Reform?," Working Papers wp220, Political Economy Research Institute, University of Massachusetts at Amherst.
    2. Professor H. B. Greven, 1887. "The Monetary System of Holland," The Quarterly Journal of Economics, Oxford University Press, pages 79-83.
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    Cited by:

    1. Sven Steinkamp & Frank Westermann, 2017. "Multilateral Loans and Interest Rates: Further Evidence on the Seniority Conundrum," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 22(2), pages 169-178, April.
    2. Matthieu Charpe & Peter Flaschel & Florian Hartmann & Roberto Veneziani, 2012. "Towards Keynesian DSGD (isequilibrium) Modelling: Real-Financial Market Interactions with Heterogeneous Expectations Dynamics," IMK Working Paper 93-2012, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.

    More about this item

    Keywords

    portfolio choice; financial accelerators; fiscal policy; monetary policy;

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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