Sentiment-driven investment, non-linear corporate debt dynamics and co-existing business cycle regimes

Benjamin Lojak

No 112, BERG Working Paper Series from Bamberg University, Bamberg Economic Research Group

Abstract: Recent evidence on the development of corporate debt suggests that firms' leverage ratios increased enormously during the past few decades. Taking into account firms financing concerns, the present work provides a dynamic disequilibrium model that is able to generate cyclical patterns of various key economic variables. One of the main features of the model is that a dynamic law governing the evolution of investor sentiment determines firms' investment through their sales expectations according to recurrent and endogenously determined waves of optimism and pessimism. The model further incorporates commercial banks providing loans to firms with the respective lending rate exhibiting a mark-up that changes endogenously with the evolution of the firms' indebtedness. It is shown that the model generates sentiment-driven business cycle fluctuations for two economic environments that exist contemporaneously: a "normal-" and "high-indebted" regime.

Keywords: Minsky Cycles; De-Leveraging; Paradox of Debt; Financial Accelerator; Business Sentiment; Kaleckian Model; Disequilibrium Model (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-bec, nep-mac and nep-sbm
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bamber:112

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