Towards Applied Disequilibrium Growth Theory: V Housing Investment Cycles, Private Debt Accumulation and Deflation

Abstract

In this paper we reconsider a general disequilibrium model of an applied orientation, exhibiting a detailed modelling of the private housing sector, which we have developed in a series of working papers starting from the Murphy model for the Australian economy. This modelling approach is complete with respect to budget equations and stock-flow interactions and can be reduced to a somewhat simplified 18D core model, the dynamics of which was intensively studied in the earlier work. In the present paper we modify this type of model towards the explicit consideration of debtor and creditor households which extends the dynamics of the core model by 1 to 19D by the addition of the dynamics of the debt to capital ratio of indebted households. Various subdynamics of these 19D dynamics are investigated theoretically and illustrated numerically. The basic findings are that there is convergence to the balanced growth path of the model for sluggish disequilibrium adjustment processes, that persistent investment cycles in the housing sector can be generated for certain higher adjustment speeds by way of Hopf-bifurcations in particular. Furthermore processes of debt deflation my trigger monotonic depressions that get more and more severe when the real debt of debtor households is systematically increased by deflationary spirals in the goods manufacturing sector in particular.

Keywords: structural macroeconomic models, housing, stability, investment cycles, debt accumulation, deflation

JEL Classification: E12, E32