ABSTRACT
In this chapter, we investigate the real…“nancial interaction of an approach of Blanchard to stock market and multiplier dynamics from the stock-”ow consistency perspective by including in the model the capacity and “nancing effect of the decisions of “rms to invest. We thus add budget equations as well as the growth law for capital stock to the Blanchard dynamics and investigate the implications of these additions for steady-state locations and their stability. We show that the steady-state solutions of the Blanchard approach are no longer of relevance here, but are replaced by a unique interior long-run solution. We demonstrate asymptotic stability with respect to this steady state when stock market adjustment is suf“ciently sluggish, even in the case of myopic perfect foresight. In the opposite situation, if the stock market adjusts suf“ciently fast, the system loses stability by way of a Hopf bifurcation for increasing adjustment speeds of capital gains expectations and will generate purely explosive behavior shortly thereafter.
