INVESTMENT CONFIDENCE, CORPORATE-DEBT AND INCOME FLUCTUATIONS

In this paper we present a macroeconomic model with New Keynesian feat ures which endogenously generates dynamic paths of income and the stoc k of corporate debt of a cyclic and chaotic nature. From the market cl earing condition on goods and money markets we derive the dynamic path s 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 neithe r too 'low' nor too 'high', the system can exhibit either bounded cycl es or chaotic dynamics. Finally, if it exceeds a critical upper value, an explosive growth of debt occurs and a financial crisis is likely t o ensue.