A dynamical model for real economy and finance

We have studied a discrete time dynamical model with four variables and delays, describing the interaction between a three-sector real economy and a financial market with four assets. Investors and financial intermediaries have heterogeneous beliefs. We show that complexity related to the evolution...

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Bibliographic Details
Published in:Mathematics and financial economics 2022-04, Vol.16 (2), p.345-366
Main Authors: Grassetti, F., Mammana, C., Michetti, E.
Format: Article
Language:English
Subjects:
Applications of Mathematics
Assets
Attitudes
Behavior
Bifurcations
Capital
Complexity
Discrete time
Dividends
Dynamic models
Economic analysis
Economic fluctuations
Economic models
Economic policy
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Elasticity
Employment
Equilibrium
Finance
Financial market
Insurance
Interdependence
Interest rates
Labor force
Macroeconomics
Macroeconomics/Monetary Economics//Financial Economics
Management
Mathematics
Mathematics and Statistics
Per capita
Prices
Pricing
Productivity
Profits
Quantitative Finance
Repetitive structures
Securities markets
Software
Stability analysis
Statistics for Business
Variables
Volatility
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Summary:We have studied a discrete time dynamical model with four variables and delays, describing the interaction between a three-sector real economy and a financial market with four assets. Investors and financial intermediaries have heterogeneous beliefs. We show that complexity related to the evolution of state variables emerges and we investigate interdependence among economic fluctuations and assets volatility. By means of stability analysis we have found that real economy influences the existence of equilibrium prices in financial markets and that risky asset prices as well as capital per capita reach zero only when the elasticity of substitution between capital and labour is low enough. Bifurcation analysis shows that an increase of bond return would decrease the price of all the assets, conversely when the bond return decreases fluctuations and complex dynamics may arise. Due to the complexity of the model, computational tools are used to investigate long run dynamics, thus showing that for sufficiently high values of the interest rate bifurcations with repetitive structure emerge. In addition, we show how the total number of shares in each sector influences its price volatility. Finally, when fluctuations appear, economic policy intended to increase employment could stabilise the model only in sufficiently developed economies.
ISSN:1862-9679
1862-9660
DOI:10.1007/s11579-021-00311-3