Financial Markets and the Macroeconomy : A Keynesian Perspective

by Chiarella, Carl; Flaschel, Peter; Franke, Reiner; Semmler, Willi

• ISBN13: 9780203880555
• ISBN10: 0203880552
• Copyright: 2009-05-28
• Publisher: Taylor & Francis

Summary

The financial instability and its spillover to the real sector have become a great challenge to macro-economic theory. The book takes a Keynesian theoretical perspective, representing an attempt to revive what Keynes stressed in his General Theory, namely the role of the financial market in macroeconomic outcomes. Although this book is inspired and motivated by the Asian currency and financial crises in the years 1997-8 and the experiences of the currently evolving U.S. financial disruptions, it also focuses on reviving a modeling tradition that provides a theoretical framework that throws light on recent financial market episodes and disturbances and their macroeconomic effects. It brings to the forefront, as Keynes has suggested, the role of financial market stability for growth and macroeconomics. It criticizes theories that see economic disruptions and shocks rooted solely in the real side of the economy. It stresses the financial real interaction as the major source for macroeconomic instability and disruptions. This important new book from a group of Keynesian, but nonetheless technically oriented economists would be of most interest to specialists and graduate students in macroeconomics and financial economics, especially those with an interest in US and European financial markets, emerging market analysis, and dynamic economic modeling.

Table of Contents

Price Dynamics and the Macroeconomy

Introduction

Keynesian AD-AS Analysis

References (to be adjusted)

Stock Market and the Macroeconomy

Introduction

The Blanchard Model

Analysis of the Blanchard Model

The Jump Variable Technique

Conclusions

References

Appendix: Some Observations

Bond Market, Term Structure and the Macroeconomy

Introduction

The Modelm

Instability and the Jump Variable Technique

Alternatives to the Jump Variable Technique

Conclusions

References

Financial Markets in Open Economies

Introduction

Exchange Rate Dynamics in the IS-LM-PC-Model: Level-form Formulation

Exchange Rate Dynamics in the IS-LM-PC-Model: Loglinear Analysis

Rational Expectations in Open Economy IS-LM-PC Dynamics

References

Stock Market and Exchange Rates, II Stock Market Dynamics and the Macroeconomy: Some Extensions

Output and Stock Market Dynamics with State-dependent Financial Market Reactions

Introduction

The Model

Analysis of the Model

State-of-Market Dependent Reaction Speed - An Alternative to the JVT

Conclusions

References

Appendix: Relaxing Perfection

Real-FinancialMarket Interaction: Implications of Budget Equations and Capital Accumulation

Introduction

The Blanchard Model with Instrinsic Stock-Flow Dynamics

Intensive Form of the Model

Analysis

Jump-variable Coundums

References

Appendix: Adding the Dynamics of the Government Budget Contraint

A

Introduction

Model

Heterogeneous Expectations

Analysis of the Deterministic Skeleton

Analysis of the Nonlinear Stochastic Model

Conclusion

Appendix

A High-Dimensional Model of Real Financial Market Interaction: The Cascade of Stable Matrices Approach

Introduction

Formulation of the Model

The Model in Intensive Form

Subdynamics in the Real and Financial Sector

Local Stability Analysis of the Full 7D Dynamics

Conclusion

Stock Market, Interest Rate and Output: A Model and Estimation for US Time Series Data

Introduction

Stylized Facts and Macromodels

A Generalized Blanchard Model

The Dynamics of the Model

Discrete Time Form for Observable Variables

Empirical Results for US Time Series Data

Stochastic Simulations and Impulse Response Functions

Conclusions

Appendix 1Stability Analysis of the Blanchard Model

Appendix 2The Characteristic Equation of the Generalized Blanchard Model, III Exchange Rate, Dynamics Capital Flows and Currency Crises

Capital Account and Government Budget Dynamics in Perfect Open Economies

Introduction

The Basic One-Good Monetary Model of International Commodity Trade

The Monetary Adjustment Process

The Two-Commodity Extension

The Perfectly Open Economy: Basic and Advanced Fomulations

Twin Deficits and PPP / UIP Driven Price Dynamics

Active Fiscal and Monetary Policy in the Perfect Open Economy

Conclusions

Twin Deficits and Inflation in the Mundell-Fleming-Tobin Model

Introduction

Temporary Equilibrium

The Six Economic Regimes of the Model

Twin Deficits and Price Level Dynamics under Fixed and Floating Exchange Rates

Capital Account and Inflation with Interest and Exchange Rate Pegs

Overshooting Exchange Rate Dynamics

Conclusions

Financial Crisis, Currency Crisis and Large Output Loss

Introduction

Stylized Facts

The Basic Model

Budget Restrictions and National Accounting

Dynamics Under Flexible Exchange Rates

Currency Crisis in a Fixed Exchange Rate Regime

Conclusions

References

Emerging Market Economies, Currency Crisis and Price Level Adjustment

Introduction

The Basic Model

Local Stability Analysis

Currency Crises in a Pegged Exchange Rate System

Currency Crisis and Hedging

Adding Wage and Price Dynamics

Stability Analysis

The Dynamics of a Currency Crisis in the Extended Model

Conclusions and Outlook

Appendix 1Balance of Payments Adjustment Processes

Appendix 2Empirical Results

Outlook: International Capital Flows in the MFT Approach

Introduction

Integrating International Capital Flows into the MFT Approach

Real-Financial Disequilibrium Dynamics: Some Basic Results

Capital Flight, Global Players and the Emergence of Currency Crises

Conclusions and Outlook

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