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Stability Analysis of a High-Dimensional Macrodynamic Model of Real-Financial Interaction: A Cascade of Matrices Approach

This paper analyzes a high-dimensional macrodynamic model of the real-financial interaction. Regarding the financial sector it focuses on the stock market dynamics, whilst for the 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. The integrated dynamics of the model constitute a seven-dimensional system of differential equations, the stability analysis of which is the main contribution of the paper. The analysis proceeds by constructing a cascade of stable matrices and thus demonstrating that the long-run equilibrium is locally stable if certain adjustments are sufficiently sluggish. Large values of some reaction parameters, on the other hand, can destabilize the economy, while a Hopf bifurcation analysis shows the potential for cyclical motion in such circumstances.

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File URL: http://www.finance.uts.edu.au/research/wpapers/wp123.pdf
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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 123.

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Date of creation: 01 Nov 2002
Date of revision:
Handle: RePEc:uts:wpaper:123
Contact details of provider: Postal: PO Box 123, Broadway, NSW 2007, Australia
Phone: +61 2 9514 7777
Fax: +61 2 9514 7711
Web page: http://www.uts.edu.au/about/uts-business-school/finance

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  1. Ricardo J. Caballero & John V. Leahy, 1996. "Fixed Costs: The Demise of Marginal q," Harvard Institute of Economic Research Working Papers 1765, Harvard - Institute of Economic Research.
  2. Sethi, Rajiv, 1996. "Endogenous regime switching in speculative markets," Structural Change and Economic Dynamics, Elsevier, vol. 7(1), pages 99-118, March.
  3. Blanchard, Olivier J, 1981. "Output, the Stock Market, and Interest Rates," American Economic Review, American Economic Association, vol. 71(1), pages 132-43, March.
  4. Evans, Martin & Wachtel, Paul, 1993. "Inflation Regimes and the," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 475-511, August.
  5. repec:cup:cbooks:9780521643511 is not listed on IDEAS
  6. Franke, Reiner & Sethi, Rajiv, 1998. "Cautious trend-seeking and complex asset price dynamics," Research in Economics, Elsevier, vol. 52(1), pages 61-79, March.
  7. Alan Kirman, 2006. "Heterogeneity in Economics," Journal of Economic Interaction and Coordination, Springer, vol. 1(1), pages 89-117, May.
  8. Franke, Reiner, 1996. "A Metzlerian model of inventory growth cycles," Structural Change and Economic Dynamics, Elsevier, vol. 7(2), pages 243-262, June.
  9. 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.
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