Real – financial market interaction: A KMG portfolio approach

An integrated monetary growth model of Keynes–Metzler–Goodwin type with a portfolio approach to its three asset markets (money, bonds, equities) is introduced to study the interaction between the real and the financial part of market economies. Beneath expectations and governmental behavior, profits and their implied dividend payments influence the behavior of asset markets, which determine interest rate and Tobin’s q by means of a general equilibrium approach. Tobin’s q drives firms’ investment in business fixed capital and performs the link from financial markets to good markets. We study the model in intensive form, the comparative statics of its asset market module, its unique interior steady state solution and its stability, the latter by way of an 8D dynamical system and its various subsystems, proving local stability assertions and the existence of so called Hopf–bifurcation that give rise to limit cycles in the 8D state space. JEL classification E12, E32, E41, E44