Investment confidence, corporate debt and income fluctuations

In this paper we present a macroeconomic model with New Keynesian features which endogenously generates dynamic paths of income and the stock of corporate debt of a cyclic and chaotic nature. From the market clearing condition on goods and money markets we derive the dynamic paths of income and corp...

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Bibliographic Details
Published in:Journal of economic behavior & organization 1993-10, Vol.22 (2), p.161-187
Main Authors: Gatti, D.Delli, Gallegati, M., Gardini, L.
Format: Article
Language:English
Subjects:
Business cycles
Corporate debt
Corporate finance
Debt management
Economic models
Income
Investment
Macroeconomics
Money markets
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Summary:In this paper we present a macroeconomic model with New Keynesian features which endogenously generates dynamic paths of income and the stock of corporate debt of a cyclic and chaotic nature. From the market clearing condition on goods and money markets we derive the dynamic paths of income and corporate debt whose stability properties depend upon the propensity to invest out of the flow of internally generated funds, which in turn is a positive function of income. If it is relatively ‘low’, the dynamic paths on income and corporate debt converge to their steady-state long-run values. When the propensity to invest is neither too ‘low’ nor too ‘high’, the system can exhibit either bounded cycles or chaotic dynamics. Finally, if it exceeds a critical upper value, an explosive growth of debt occurs and a financial crisis is likely to ensue.
ISSN:0167-2681
1879-1751
DOI:10.1016/0167-2681(93)90062-T