Finance Discipline Group
UTS Business School
University of Technology, Sydney

Working Paper Series

Real-Financial Interaction: Integrating Supply Side Wage-Price Dynamics and the Stock Market
Author(s): Carl Chiarella, Peter Flaschel, Reiner Franke & Willi Semmler
Date of publication: September 2001
Working paper number: 112
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.
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