Finance Discipline Group
UTS Business School
University of Technology, Sydney

Working Paper Series

Price Flexibility and Debt Dynamics in a High Order AS-AD Model
Author(s): Carl Chiarella, Peter Flaschel & Willi Semmler
Date of publication: September 2000
Working paper number: 109
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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Comments: 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.
Known citations:

Asada, T., 2006, "Stabilization Policy in a Keynes-Goodwin Model with Debt Accumulation", Structural Change and Economic Dynamics, 17(4), 466-485.

Asada, T., 2006, "Inflation Targeting Policy in a Dynamic Keynesian Model with Debt Accumulation: A Japanese Perspective", in (ed.) Quantitative and Empirical Analysis of Nonlinear Dynamic Macromodels (Contributions to Economic Analysis, 277, 517-544

Chiarella, C. and Flaschel, P., 2003, "Towards Applied Disequilibrium Growth Theory: V Housing Investment Cycles, Private Debt Accumulation and Deflation", Working Paper Number: 97, Finance Discipline Group, University of Technology, Sydney.

Chiarella, C., Flaschel, P. and Zhu, P., 2003. "Towards Applied Disequilibrium Growth Theory: IV Numerical Investigations of the Core 18D Model", Working Paper Number: 96, Finance Discipline Group, University of, Technology, Sydney.

Flaschel, P., 2001, "Disequilibrium Growth in Monetary Economics: Basic Components and the KMG Working Model", in Lionello F. Punzo (ed) Cycles, Growth and Structural Change: Theories and Empirical Evidence, 128-168.

Yagoubi, S. and Hamdaoui, M., 2013, "Fair Value, Capital Accumulation and Financial Instability: A Macrodynamic Model", International Journal of Economics and Finance, 5(4), 116-130.