Applying Disequilibrium Growth Theory: Debt Effects and Debt Deflation

Carl Chiarella and Peter Flaschel

No 714, Computing in Economics and Finance 1999 from Society for Computational Economics

Abstract: In this paper, we consider two polar dynamical models in which firms use debt (loans) to finance their investment expenditure: a three-dimensional supply-driven model and a sophisticated 20-D Keynesian growth model. In the first, firms' debt accumulations interact with the income distribution and resulting capital-stock and employment-growth patterns. In the second, a high-dimensional model, we have sluggishly adjusting prices and quantities, Keynesian demand rationing, and fluctuating capacity utilization for both labor and capital -- with all budget equations specified and a balanced-growth reference path. These polar growth perspectives are brought together in an intermediate 4-D dynamics, where the debt accumulation of the simple model is combined with the possibility of the deflationary processes of the general model. This intermediate case allows the formulation and investigation, both analytically and numerically, of situations of debt deflation in a demand-constrained setup that augments the insights obtained from the simple model and illustrates an important destabilizing feedback chain in the general 20-D dynamics.

Date: 1999-03-01
New Economics Papers: this item is included in nep-dev, nep-fin and nep-pke
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Citations: View citations in EconPapers (3)

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