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Price Flexibility and Debt Dynamics in a High Order AS-AD Model

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In this paper we reconsider extensions and modifications of earlier work on a disequilibrium model of AS-AD growth. Our dynamic model exhibits more or less sluggishly adjusting prices and quantities, Keynesian demand rationing and fluctuating capacity utilization for both labor and capital. Firms use debt (and pure profits) to finance their investment expenditures. We first prove that the resulting 7D core dynamics are convergent (broadly speaking) for low adjustment speeds. We then demonstrate partly analytically and partly numerically that their interior steady state will lose asymptotic stability by way of Hopf bifurcations when relevant adjustment speeds are made sufficiently large. This holds in particular for debt deflation, where falling price levels (caused by price flexibility that is sufficiently high) cause significantly increasing real debt, falling investment and shrinking economic activity. This deepens the deflationary process already under way. Such an instability result even occurs in the case where accompanying real wage increases would support economic stability.

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Paper provided by Finance Discipline Group, UTS Business School, University of Technology, Sydney in its series Working Paper Series with number 109.

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Length: 27 pages
Date of creation: 01 Sep 2000
Publication status: Published as: Chiarella, C., Flaschel, P. and Semmler, W., 2001, "Price Flexibility and Debt Dynamics in a High Order AS-AD Model", Central European Journal of Operation Research, 9, 119-145.
Handle: RePEc:uts:wpaper:109
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  1. Gene M. Grossman (ed.), 1996. "Economic Growth," Books, Edward Elgar Publishing, volume 0, number 553.
  2. Chiarella,Carl & Flaschel,Peter, 2011. "The Dynamics of Keynesian Monetary Growth," Cambridge Books, Cambridge University Press, number 9780521180184, December.
  3. Robert Becker & Edwin Burmeister (ed.), 1990. "Growth Theory," Books, Edward Elgar Publishing, volume 0, number 534.
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