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Expectations, firms' indebtedness and business fluctuations in a structural keynesian monetary growth framework

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.