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

Listed author(s):
  • Ahmad Naimzada
  • Marina Pireddu

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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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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  1. Ahmad Naimzada & Marina Pireddu, 2013. "Dynamics in a nonlinear Keynesian good market model," Working Papers 254, University of Milano-Bicocca, Department of Economics, revised Sep 2013.
  2. Matthias Lengnick & Hans-Werner Wohltmann, 2013. "Agent-based financial markets and New Keynesian macroeconomics: a synthesis," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 8(1), pages 1-32, April.
  3. Hommes,Cars, 2015. "Behavioral Rationality and Heterogeneous Expectations in Complex Economic Systems," Cambridge Books, Cambridge University Press, number 9781107564978, October.
  4. Hommes,Cars, 2013. "Behavioral Rationality and Heterogeneous Expectations in Complex Economic Systems," Cambridge Books, Cambridge University Press, number 9781107019294, October.
  5. 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.
  6. 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).
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