INVESTMENT CONFIDENCE, CORPORATE-DEBT AND INCOME FLUCTUATIONS

In this paper we present a macroeconomic model with New Keynesian features which endogenously generates dynamic paths of income and the stock of corporate debt of a cyclic and chaotic nature. From the market clearing condition on goods and money markets we derive the dynamic paths of income and corporate debt whose stability properties depend upon the propensity to invest out of the flow of internally generated funds, which in turn is a positive function of income. If it is relatively 'low, the dynamic paths on income and corporate debt converge to their steady-state long-run values. When the propensity to invest is neither too 'low' nor too 'high', the system can exhibit either bounded cycles or chaotic dynamics. Finally, if it exceeds a critical upper value, an explosive growth of debt occurs and a financial crisis is likely to ensue.