Finance Discipline Group
UTS Business School
University of Technology, Sydney

Working Paper Series

Stability Analysis of a High-Dimensional Macrodynamic Model of Real-Financial Interaction: A Cascade of Matrices Approach
Author(s): Carl Chiarella, Peter Flaschel, Reiner Franke & Willi Semmler
Date of publication: November 2002
Working paper number: 123
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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Known citations:

Asada, T., 2003, "A Two-Regional Model of Business Cycles with Fixed Exchange Rates: Cycles with Fixed Exchange Rates: A Kaldorian Approach", Working Paper.

Asada, T. and Chen, P., 2004, "Keynesian Dynamics and the Wage Price Spiral. A Baseline Disequilibrium Approach", Presentation at Computing in Economics and Finance 2004, Society for Computational Economics.

Asada, T., Chen, P, Chiarella, C. and Flaschel, P., 2006. "Keynesian Dynamics and the Wage-Price Spiral: A Baseline Disequilibrium Model", Journal of Macroeconomics, 28(1), 90-130.

Asada, T., Chiarella, C. and Flaschel, P, 2003. "Keynes-Metzler-Goodwin Model Building: The Closed Economy", Working Paper Number: 124, Finance Discipline Group, University of Technology, Sydney.

Chiarella, C., Flaschel, P. and Semmler, W., 2003. "Real-Financial Interaction: Implications of Budget Equations and Capital Accumulation", Working Paper Number: 127, Finance Discipline Group, University of Technology, Sydney.

Chiarella, C., Flaschel, P., Franke, R. and Semmler, W., 2003. "Output and the Term Structure of Interest Rates: Ways Out of th Jump-Variable Conundrum", Working Paper Number: 125, Finance Discipline Group, University of Technology, Sydney.