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Real-Financial Interaction: Integrating Supply Side Wage-Price Dynamics and the Stock Market

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Abstract

The paper put forward a macrodynamic model of the real-financial interaction. Regarding the financial sector it focuses on the stock market dynamics, for real sector it details goods market disequilibrium and two Phillips curves for prices as well as wages. The central link between the two sectors is constituted by Tobin's (average) q. After highlighting the main feedback mechanisms in the real and financial subdynamics, the long-run equilibrium of the integrated 7th-order dynamic system is shown to be locally stable if certain adjustments are sufficiently sluggish, while large values of some reaction parameters can destabilize the economy. Lastly, the analysis reveals the potential for cyclical motion.

Suggested Citation

  • Carl Chiarella & Peter Flaschel & Reiner Franke & Willi Semmler, 2001. "Real-Financial Interaction: Integrating Supply Side Wage-Price Dynamics and the Stock Market," Working Paper Series 112, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  • Handle: RePEc:uts:wpaper:112
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    File URL: http://www.finance.uts.edu.au/research/wpapers/wp112.pdf
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    References listed on IDEAS

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    1. Chiarella,Carl & Flaschel,Peter, 2011. "The Dynamics of Keynesian Monetary Growth," Cambridge Books, Cambridge University Press, number 9780521180184, Fall.
    2. Evans, Martin & Wachtel, Paul, 1993. "Inflation Regimes and the," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 475-511, August.
    3. Blanchard, Olivier J, 1981. "Output, the Stock Market, and Interest Rates," American Economic Review, American Economic Association, vol. 71(1), pages 132-143, March.
    4. Franke, Reiner & Sethi, Rajiv, 1998. "Cautious trend-seeking and complex asset price dynamics," Research in Economics, Elsevier, vol. 52(1), pages 61-79, March.
    5. Ricardo J. Caballero & John V. Leahy, 1996. "Fixed Costs: The Demise of Marginal q," NBER Working Papers 5508, National Bureau of Economic Research, Inc.
    6. Franke, Reiner, 1996. "A Metzlerian model of inventory growth cycles," Structural Change and Economic Dynamics, Elsevier, vol. 7(2), pages 243-262, June.
    7. Sethi, Rajiv, 1996. "Endogenous regime switching in speculative markets," Structural Change and Economic Dynamics, Elsevier, vol. 7(1), pages 99-118, March.
    8. 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.
    9. H. Rose, 1967. "On the Non-Linear Theory of the Employment Cycle," Review of Economic Studies, Oxford University Press, vol. 34(2), pages 153-173.
    10. Reiner Franke & Willi Semmler, 1999. "Bond Rate, Loan Rate and Tobin's q in a Temporary Equilibrium Model of the Financial Sector," Metroeconomica, Wiley Blackwell, vol. 50(3), pages 351-385, October.
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    More about this item

    Keywords

    real-financial interaction; tobin's average q; wage-price dynamics; higher-order local stability analysis; hopf bifurcation;

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian

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