Abstract
In this contribution we incorporate the main elements of the small-scale firms’ debt-finance model by Franke and Semmler (1989) into a medium-scale disequilibrium macroeconomic framework along the lines of Chiarella, Flaschel and Franke (2005). In a fully interdependent model incorporating investing firms, savings of rentier households, commercial banks and the government, the endogenously generated debt of firms (created through borrowing) feeds back dynamically to the investment behaviour of firms, their borrowing of funds, the asset market, the interest rate and the expected rate of return (representing the confidence of investors with regard to future development). The impact of debt-financing of firms on aggregate economic activity and its stability will be studied within this context. We also investigate the dynamics of the resulting model by means of numerical simulations.
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Notes
- 1.
On more empirical grounds, recent work by Covas and Den Haan (2012) has stressed the fact that the relative importance of these two types of financing depends on the firm’s size, with small firms and start-ups being more reliant on equity finance, and large and more established firms being more debt-finance oriented.
- 2.
Equity financing is therefore considered here as a residual in the present formulation of the firms’ behaviour.
- 3.
- 4.
Money receipts—injections of new money—are assumed to be immediately channeled to the banks and held there as demand or time deposits.
- 5.
As we assume that the two types of deposit holdings, and their particular composition does not feed back into the rest of the economy’s structure, both of them will be neglected in the following.
- 6.
Since we make use of Metzlerian delayed output adjustment in place of an IS-equilibrium condition, we cannot assume as Franke and Semmler (1989) that the actual rate of profit automatically adjusts to bring about equilibrium in the goods markets.
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Charpe, M., Flaschel, P., Proaño, C.R., Semmler, W. (2014). Expectations, Firms’ Indebtedness and Business Fluctuations in a Structural Keynesian Monetary Growth Framework. In: Dieci, R., He, XZ., Hommes, C. (eds) Nonlinear Economic Dynamics and Financial Modelling. Springer, Cham. https://doi.org/10.1007/978-3-319-07470-2_4
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DOI: https://doi.org/10.1007/978-3-319-07470-2_4
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