Output, Financial Markets and Growth

SSRN Electronic Journal, 2000

Research by this group has produced significant advances in the application and development of time series econometrics, issues of monetary policy, financial markets, forecasting and high frequency data analysis. The group of Macroeconomics and Financial Markets was created with the arrival of David Peel, who is in the top 2% of most highly-cited economists according to REPEC, in 2004. Its substantial growth over the last decade has been accompanied by a diversification in both theoretical and applied aspects of macroeconomics and financial economics. Their research has produced advances in the application of nonlinear time series models to parity conditions and modelling of exchange rates in the presence of commodity market frictions. In the domain of time series econometrics their work has shed light on the effects of temporal aggregation on estimation methods and on the computation of IRFs; the impact of conditional heteroskedasticity on linearity tests and model specification procedures; the performance of forecast evaluation measures, and the modeling and forecasting of high frequency data in equity and foreign exchange markets. Members of the group are currently working on new tests for detecting rational bubbles in asset prices; applied Bayesian econometrics; and volatility modelling and forecasting. Members of this research group support the UK Housing Market Observatory. This website provides real-time monitoring of the UK national and regional real estate markets and indicators of house price exuberance based on econometric methods. This information can be used to identify the time when exuberance escalates in housing markets and the degree of synchronisation across regions in the UK. This research group has recently developed the macro theory capacity and has complemented the already existing interest in theoretical modeling of central banks with asymmetric preferences with advances in the analysis of optimal monetary and fiscal policy in New Keynesian models embodying limited asset market participation and habit persistence; as well as the macro-prudential roles of bank capital regulation and monetary policy in DSGE models with endogenous financial frictions. Other topics that our colleagues have contributed to in the recent past include the estimation of stochastic frontier models; efficiency and productivity analysis, in particular, of the banking sector; the analysis of gambling markets, and the study of Hayek.

Studies in Nonlinear Dynamics & Econometrics, 2002

In this paper we construct a model of stock market, interest rate and output interaction which is a generalization of the well known 1981 model of Blanchard. We allow for imperfect substitutability between stocks and bonds in the asset market and for lagged portfolio adjustment. The reaction of agents to changes in the stock market is dependent on the state of the economy. We analyze the dynamics of the model and its local stability properties. A discretization in terms of observable variables is derived. Some empirical results for U.S. output, stock price and interest rate data are presented using nonlinear least square estimates. We perform some stochastic simulations of the estimated non-linear model, obtaining distributions of the key economic quantities, their autocorrelation structure and financial statistics which are compared with historical data and RBC models. In addition, following Mittnik and Zadrozny (1993) a VAR with confidence bands for historical data is estimated and cumulative impulse-response functions compared to the model's impulse response functions. We find that the model captures a number of features of the data.

1998

Journal of Economic Surveys, 2011

This paper presents the 'KMGT' (Keynes-Metzler-Goodwin-Tobin) portfolio model and studies its stability properties. The approach to macrodynamic modelling taken here extends the KMG model of , focusing in particular on the incorporation of financial markets and policy issues. The original KMG model considered three asset markets (equities, bonds and money) but depicted them in a rudimentary way so that they had little influence on the real side of the model. The only financial market influencing the real side of the economy was the money market (via an LM curve theory of interest). Here Tobin's portfolio choice theory models the demand for each asset in such a way that the total amount of assets that households want to hold equals their net wealth, which is a stock constraint attached to portfolio choice. There is also a flow constraint, that the net amount of assets accumulated (liabilities issued) by one sector must equal its net savings (expenditures). The Tobinian macroeconomic portfolio approach characterizes the potential for financial market instability, focusing on the interconnectedness of all three markets. The paper goes on to study the potential for labour market and fiscal policies to stabilize unstable macroeconomies.

SSRN Electronic Journal, 2000

Atlantic Economic Journal, 1979

In a recent issue of this journal, Arthur Benavie [1976] argues that asset markets have been formulated in two different ways in macroeconomic models) In Tobin's models, the stock of any asset is the quantity which exists at the beginning of the period so that current period asset stocks are not influenced by current asset flows. On the other hand, in Patinkin's model, the stock of an asset is the quantity existing at the end of the period, implying that the current period asset stock contains the entire current period flow. Benavie contends that both the Tobin and the Patinkin formulations are special cases o~f a more general model wherein some portion, though not necessarily all, of the current period flow is included in the current period asset stock.

Journal of Economic Dynamics and Control, 2014

As recent experience suggests, the most significant economic fluctuations are those that combine real and financial factors. This paper works out a simple model that couples a version of Goodwin's (1967) growth cycle model of real fluctuations with insights drawn from a model of financial fluctuations based on Minsky's financial instability hypothesis (Vercelli, 2000; Sordi and Vercelli, 2006, 2012). The model suggested substantially modifies that of Keen (1995), who combined insights from Goodwin and Minsky within a model of fluctuating growth. In the real part of the model we introduce the possibility of disequilibrium in the goods market and formalize a mechanism of output adjustment based on the conventional dynamic multiplier. The model so obtained may exhibit persistent dynamics and provide insights to enable better understanding of the nature of real-world fluctuations.

Journal of Economic Interaction and Coordination, 2021

We propose a model economy consisting of interdependent real, monetary and stock markets. The money market is influenced by the real one through a standard LM equation. Private expenditures depend on stock prices, which in turn are affected by interest rates and real profits, as these contribute to determine the participation level in the stock market. An evolutionary mechanism regulates agents’ participation in the stock market on the basis of a fitness measure that depends on the comparison between the stock return and the interest rate. Relying on analytical investigations complemented by numerical simulations, we study the economically relevant static and dynamic properties of the equilibrium, identifying the possible sources of instabilities and the channels through which they spread across markets. We aim at understanding what micro- and macro-factors affect the dynamics and, at the same time, how the dynamics of asset prices, which are ultimately influenced by the money marke...

Review of International Economics, 2003

In this paper, we study the effect of financial markets on the investment of a two-good two-country economy with stochastic production in a dynamic framework. Each country produces and invests only one good and, therefore, makes decisions as a central planner in an optimal growth model. Trade between consumers of both countries, however, takes place on competitive (spot or financial) markets. We compare the investment-consumption decisions of both 'market' models with the benchmark-case of an integrated world-equilibrium. In the log-linear case, we can uniquely characterize the state-dependent preferences of consumers that lead to dynamically efficient investment decisions. We show that the investment decisions in both 'market' models are, in general, inefficient as compared with the efficient, or integrated world economy, case.

Journal of Macroeconomics, 1995

Frequently, intertemporal models, for example, Uzawa's (1969) work on growth, are based on the separation of investment and the financing decisions of firms. Finance variables are disregarded. In contrast, along the lines of the theory of imperfect capital markets, the ...

SSRN Electronic Journal, 2000

arXiv (Cornell University), 2024

In a series of precedent papers, we have presented a comprehensive methodology, termed Field Economics, for translating a standard economic model into a statistical field-formalism framework. This formalism requires a large number of heterogeneous agents, possibly of different types. It reveals the emergence of collective states among these agents or type of agents while preserving the interactions and microeconomic features of the system at the individual level. In two prior papers, we applied this formalism to analyze the dynamics of capital allocation and accumulation in a simple microeconomic framework of investors and firms. Building upon our prior work, the present paper refines the initial model by expanding its scope. Instead of considering financial firms investing solely in real sectors, we now suppose that financial agents may also invest in other financial firms. We also introduce banks in the system that act as investors with a credit multiplier. Two types of interaction are now considered within the financial sector: financial agents can lend capital to, or choose to buy shares of, other financial firms. Capital now flows between financial agents and is only partly invested in real sectors, depending on their relative returns. We translate this framework into our formalism and study the diffusion of capital and possible defaults in the system, both at the macro and micro level. At the macro level, we find that several collective states may emerge, each characterized by a distinct level of average capital and investors per sector. These collective states depend on external parameters such as level of connections between investors or firms' productivity. The multiplicity of possible collective states is the consequence of the nature of the system composed of interconnected heterogeneous agents. Several equivalent patterns of returns and portfolio allocation may emerge. The multiple collective states induce the unstable nature of financial markets, and some of them include defaults may emerge. At the micro level, we study the propagation of returns and defaults within a given collective state. Our findings highlight the significant role of banks, which can either stabilize the system through lending activities or propagate instability through loans to investors.

Carnegie-Rochester Conference Series on Public Policy, 1984

The treatment of the stock market in finance and macroeconomics exemplifies many of the important differences in perspective between the two fields. In finance, the stock market is the single most important market with respect to corporate investment decisions. In contrast, macroeconomic modelling and policy discussion assign a relatively minor role to the stock market in investment decisions. This paper explores four possible explanations for this neglect and concludes that macro analysis should give more attention to the stock market. Despite the frequent jibe that "the stock market has forecast ten of the last six recessions," the stock market is in fact a good predictor of the business cycle and the components of GNP. We examine the relative importance of the required return on equity compared with the interest rate in the determination of the cost of capital, and hence, investment. In this connection, we review the empirical success of the Q theory of investment which relates investment to stock market evaluations of firms. One of the explanations for the neglect of the stock market in macroeconomics may be the view that because the stock market fluctuates excessively, rational managers will pay little attention to the market in formulating investment plans. This view is shown to be unfounded by demonstrating that rational managers will react to stock price changes even if the stock market fluctuates excessively. Finally, we review the extremely important issue of whether the market does fluctuate excessively, and conclude that while not ruled out on a priori theoretical grounds, the empirical evidence for such excess fluctuations has not been decisive.

Cambridge Journal of Economics, 2011

Resumo: Este texto argumenta que modelos de "consistência entre fluxos e estoques" -i.e. modelos que identificam os agentes econômicos com as principais categorias sociais/setores institucionais, descrevem o comportamento desses agentes no curto prazo e tratam de forma consistente as implicações patrimoniais desses comportamentos "período a período" -são (i) perfeitamente compatíveis com empreendimentos intelectuais (teóricos ou históricos) inspirados na visão e nas teorias elaboradas por Keynes ao longo de toda sua carreira; (ii) a ferramenta teórica ideal para análises pós-keynesianas de médio prazo; e, portanto, (iii) cruciais para a afirmação do projeto de pesquisa pós-keynesiano mais amplo. Palavras-chave: fluxos e estoques; análises macrodinâmicas; "Escola pós-keynesiana".