Real Financial Interaction: Integrating Supply Side Wage-Price Dynamics and the Stock Market

The paper puts forward a macrodynamic model of the realnancial interaction. Regarding the nancial sector it focuses on the stock market dynamics, for the real sector it details goods market disequilibrium and two Phillips curves for prices as well as wages. The central link between the two sectors is constituted by Tobin's (average) q. After highlighting the main feedback mechanisms in the real and nancial subdynamics, the long-run equilibrium of the integrated 7th-order dynamic system is shown to be locally stable if certain adjustments are suÆciently sluggish, while large values of some reaction parameters can destabilize the economy. Lastly, the analysis reveals the potential for cyclical motion. JEL classi cation: E12.