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

Carl Chiarella, Peter Flaschel, Reiner Franke and Willi Semmler

No 112, Working Paper Series from Finance Discipline Group, UTS Business School, University of Technology, Sydney

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.

Keywords: real-financial interaction; tobin's average q; wage-price dynamics; higher-order local stability analysis; hopf bifurcation (search for similar items in EconPapers)
JEL-codes: E12 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2001-09-01
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