Tobinian Stock-Flow Interactions in the KMG Framework

Toichiro Asada, Peter Flaschel, Tarik Mouakil and Christian Proaño
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Toichiro Asada: Chuo University
Tarik Mouakil: University of Cambridge

Chapter 3 in Asset Markets, Portfolio Choice and Macroeconomic Activity, 2011, pp 27-61 from Palgrave Macmillan

Abstract: Abstract This chapter presents the ‘KMG-Tobin’ portfolio model and studies its (in)stability properties. This macrodynamic model is an ‘old Keynesian’ extension of the Keynes-Metzler-Goodwin (KMG) model of Chiarella and Flaschel (2000a) and its aim is to improve the financial side of the latter. In the KMG model, three asset markets are considered (equities, bonds and money) but they are depicted in a rudimentary way and have little influence on the real side of the model. The equities market is presented only in nominal terms and the mechanism through which the price of equities is determined is left in the background. This price does not play any role in the KMG model, due to the absence of wealth and capital gains income effects on aggregate demand. In the same way, asset-holding households are supposed to hold government bonds, but the feedback of their rate of change — determined by government budget constraint — is suppressed via a suitably chosen taxation rule such that there is no interest income effect on asset holders’ consumption. The only financial market used to influence the real side of the economy is the money market (providing an LM curve theory of interest) through the negative effect of the interest rate on the rate of investment. However, this financial market does not explicitly interact with the two others since the demand for money is here simply providing a LM curve giving rise to a stable relationship between the nominal rate of interest, the output-capital ratio and supplied real balances per unit of capital.

Keywords: Central Bank; Real Wage; Capital Gain; Money Demand; Asset Market (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-30777-3_3

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DOI: 10.1057/9780230307773_3

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