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Applying Disequilibrium Growth Theory: Debt Effects and Debt Deflation

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  • Carl Chiarella

    () (University of Technology, Sydney)

  • Peter Flaschel

    () (University of Bielefeld)

Abstract

In this paper, we consider two polar dynamical models in which firms use debt (loans) to finance their investment expenditure: a three-dimensional supply-driven model and a sophisticated 20-D Keynesian growth model. In the first, firms' debt accumulations interact with the income distribution and resulting capital-stock and employment-growth patterns. In the second, a high-dimensional model, we have sluggishly adjusting prices and quantities, Keynesian demand rationing, and fluctuating capacity utilization for both labor and capital -- with all budget equations specified and a balanced-growth reference path. These polar growth perspectives are brought together in an intermediate 4-D dynamics, where the debt accumulation of the simple model is combined with the possibility of the deflationary processes of the general model. This intermediate case allows the formulation and investigation, both analytically and numerically, of situations of debt deflation in a demand-constrained setup that augments the insights obtained from the simple model and illustrates an important destabilizing feedback chain in the general 20-D dynamics.

Suggested Citation

  • Carl Chiarella & Peter Flaschel, 1999. "Applying Disequilibrium Growth Theory: Debt Effects and Debt Deflation," Computing in Economics and Finance 1999 714, Society for Computational Economics.
  • Handle: RePEc:sce:scecf9:714
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    References listed on IDEAS

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    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Ray C. Fair, 2000. "Testing the NAIRU Model for the United States," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 64-71, February.
    3. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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    Cited by:

    1. Carl Chiarella & Peter Flaschel, 1999. "Towards Applied Disequilibrium Growth Theory: I The Starting Model," Working Paper Series 93, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    2. Carl Chiarella & Peter Flaschel & Gangolf Groh & Carsten Köper & Willi Semmler, 1999. "Towards Applied Disequilibrium Growth Theory: VI Substitution, Money-Holdings, Wealth-Effects and Further Extensions," Working Paper Series 98, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    3. Carl Chiarella & Peter Flaschel & Willi Semmler, 2001. "The macrodynamics of debt deflation," Chapters,in: Financial Fragility and Investment in the Capitalist Economy, chapter 7 Edward Elgar Publishing.

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