Integration of Real and Monetary Sectors

This is the third paper of a series of macroeconomic modeling that tries to model macroeconomic dynamics on the basis of the principle of accounting system dynamics developed by the author. Money supply and creation processes of deposits were modeled in the first paper, while second paper built dynamic determination processes of GDP, interest rate and price level. In this paper, these two separate models are integrated to present a complete macroeconomic dynamic model consisting of real and monetary sectors. For its completion, population dynamics and labor market is additionally included. The integrated model is aimed to be generic, out of which diverse macroeconomic behaviors are shown to emerge. Specifically equilibrium growth path, business cycles and government debt issues are discussed in this paper. 1 Macroeconomic System Overview This is the third paper of a series of macroeconomic modeling that tries to model macroeconomic dynamics. In the first paper [6], money supply and creation processes of deposits were modeled. Analytical method employed in the ∗This paper is presented at the 24th International Conference of the System Dynamics Society, Nijmegen, The Netherlands, July 23-27, 2006. I’m very grateful to Prof. Jay Forrester for his kindly giving me an opportunity to learn his ongoing National Model project in the afternoon of September 14, 2005, at his MIT office. Since then, this two hours’ intensive dialogue with him has been a source of encouragement for my continuing present series of macroeconomic modeling research. I’m also very thankful to Prof. George Akerlof who managed to arrange his extremely busy time in the afternoon of September 19, 2005, for discussions on my macroeconomic model at his office, University of California, Berkeley. This research is partially supported by the grant awarded by the Japan Society for the Promotion of Science. 1 model is the principle of accounting system dynamics developed by the author [5]. For the analysis of money supply only three macroeconomic sectors were brought to attention; that is, central bank, commercial banks and non-financial sector as shown in Figure 1. In the second paper [7], dynamic determination