Financial fragility and economic fluctuations

Abstract

This paper proposes a simple prototype model that describes the complex dynamics of a sophisticated monetary economy. The interaction between the current and intertemporal financial constraints on economic units brings about irregular fluctuations at both micro and macro levels. We use qualitative dynamic analysis and numerical simulations to investigate the interaction between financial fragility, modeled in terms of structural instability, and dynamically unstable financial fluctuations. The model, suggested recently by one of the authors, is here reformulated in more operational terms and extended in a number of new directions.