Financial dynamics in the medium run

Abstract

We develop a medium-run dynamic model to investigate the effects of financial factors and production technique on a capitalist economy. We incorporate neoclassical elements and contributions of Keynes, Kalecki, and Minsky into the model. We formulate a price decision and endogenous money supply mechanism. The medium-run steady state is constrained by the normal capacity utilization rate. Moreover, the economy can become endogenously unstable if bank lending reacts excessively to the firm's profit rate. In a stable economy, an increase in the target-inflation rate increases the expected inflation rate and interbank rate but does not affect the optimal labor-capital ratio.