No abstract

No abstract

In order to better understand relationships between the real economy and financial economy, it is necessary to formulate a model of financing. New Keynesian theory emphasizes that a firm's net worth influences investment decisions and business cycles under an imperfect capital market. We have constructed a dynamic model from the standpoint of post Keynesian economics. We incorporate a dynamic equation of a firm's net worth ratio and investigate financial factors, which give rise to economic instability. Our results demonstrate that a steady state can be a saddle point when the dividend rate is low and the bank's lending reaction to the net worth ratio is more elastic than investment reaction. When the steady state is the saddle, the change in the basic discount rate is likely to shift the economy from an unstable path to a convergence path. Financial policy has a stabilizing effect in the long-run as well as a positive effect in the short-run.

This paper extends a Minsky model by incorporating net worth ratio, which Steindl stressed the importance of in reference to financial markets. We construct a dynamic macroeconomic model comprising discrete equations of both the net worth ratio and interest rate. We investigate what factors bring the instability of the steady state. We show that the effect of asset income on consumption can contribute to economic stability following Lavoie (1995) and Hein (2007). On the other hand, the economy becomes unstable when a bank's lending reaction is elastic with respect to the net worth ratio of the firm. When the steady state is a saddle point, the monetary policy is likely to shift the economy from an unstable path to a convergence path. It can be said that monetary policy may have a stabilizing effect in the long run, however, in practice, there would be considerable difficulties in accomplishing this.

We develop a medium-run dynamic model to investigate the effects of financial factors and production technique on a capitalist economy. We incorporate neoclassical elements and contributions of Keynes, Kalecki, and Minsky into the model. We formulate a price decision and endogenous money supply mechanism. The medium-run steady state is constrained by the normal capacity utilization rate. Moreover, the economy can become endogenously unstable if bank lending reacts excessively to the firm's profit rate. In a stable economy, an increase in the target-inflation rate increases the expected inflation rate and interbank rate but does not affect the optimal labor-capital ratio.