Inflation and speculation in a dynamic macroeconomic model

TL;DR

This paper extends a macroeconomic model to include dynamic prices and speculation, analyzing stability and new behaviors like financial crises and their relation to growth.

Contribution

It introduces a monetary Keen model with dynamic prices and speculation, revealing new equilibrium states and qualitative behaviors including financial crises.

Findings

Identification of recession states with deflation and stable wages

Model's ability to generate repeated financial crises

Insights into the link between economic growth and financial activities

Abstract

We study a monetary version of the Keen model by merging two alternative extensions, namely the addition of a dynamic price level and the introduction of speculation. We recall and study old and new equilibria, together with their local stability analysis. This includes a state of recession associated with a deflationary regime and characterized by falling employment but constant wage shares, with or without an accompanying debt crisis. We also emphasize some new qualitative behavior of the extended model, in particular its ability to produce and describe repeated financial crises as a natural pace of the economy, and its suitability to describe the relationship between economic growth and financial activities.