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Sentiment-driven investment, non-linear corporate debt dynamics and co-existing business cycle regimes

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  • Lojak, Benjamin

Abstract

Recent evidence on the development of corporate debt suggests that firms' leverage ratios increased enormously during the past few decades. Taking into account firms financing concerns, the present work provides a dynamic disequilibrium model that is able to generate cyclical patterns of various key economic variables. One of the main features of the model is that a dynamic law governing the evolution of investor sentiment determines firms' investment through their sales expectations according to recurrent and endogenously determined waves of optimism and pessimism. The model further incorporates commercial banks providing loans to firms with the respective lending rate exhibiting a mark-up that changes endogenously with the evolution of the firms' indebtedness. It is shown that the model generates sentiment-driven business cycle fluctuations for two economic environments that exist contemporaneously: a "normal-" and "high-indebted" regime.

Suggested Citation

  • Lojak, Benjamin, 2016. "Sentiment-driven investment, non-linear corporate debt dynamics and co-existing business cycle regimes," BERG Working Paper Series 112, Bamberg University, Bamberg Economic Research Group.
    • Handle: RePEc:zbw:bamber:112
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    Cited by:

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    2. Roberto Veneziani & Luca Zamparelli & Reiner Franke & Frank Westerhoff, 2017. "Taking Stock: A Rigorous Modelling Of Animal Spirits In Macroeconomics," Journal of Economic Surveys, Wiley Blackwell, vol. 31(5), pages 1152-1182, December.
    3. Martin Carolin & Westerhoff Frank, 2019. "Regulating Speculative Housing Markets via Public Housing Construction Programs: Insights from a Heterogeneous Agent Model," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 239(4), pages 627-660, August.
    4. March, Christoph & Sahm, Marco, 2018. "Contests as selection mechanisms: The impact of risk aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 150(C), pages 114-131.
    5. Roberto Dieci & Noemi Schmitt & Frank Westerhoff, 2018. "Steady states, stability and bifurcations in multi-asset market models," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 41(2), pages 357-378, November.
    6. Hommes, Cars & Lustenhouwer, Joep & Mavromatis, Kostas, 2018. "Fiscal consolidations and heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 87(C), pages 173-205.
    7. Lustenhouwer, Joep & Mavromatis, Kostas, 2017. "Fiscal consolidations and finite planning horizons," BERG Working Paper Series 130, Bamberg University, Bamberg Economic Research Group.
    8. González-Díaz, Julio & Herold, Florian & Domínguez, Diego, 2016. "Strategic sequential voting," BERG Working Paper Series 113, Bamberg University, Bamberg Economic Research Group.
    9. Mundt, Philipp & Oh, Ilfan, 2019. "Asymmetric competition, risk, and return distribution," BERG Working Paper Series 145, Bamberg University, Bamberg Economic Research Group.
    10. Sahm, Marco, 2017. "Risk aversion and prudence in contests," BERG Working Paper Series 120, Bamberg University, Bamberg Economic Research Group.
    11. March, Christoph & Sahm, Marco, 2017. "Asymmetric discouragement in asymmetric contests," Economics Letters, Elsevier, vol. 151(C), pages 23-27.
    12. Hommes, Cars & Lustenhouwer, Joep, 2019. "Managing unanchored, heterogeneous expectations and liquidity traps," Journal of Economic Dynamics and Control, Elsevier, vol. 101(C), pages 1-16.
    13. Sahm, Marco, 2017. "Are sequential round-robin tournaments discriminatory?," BERG Working Paper Series 121, Bamberg University, Bamberg Economic Research Group.
    14. Sahm, Marco, 2016. "Advance-purchase financing of projects with few buyers," BERG Working Paper Series 118, Bamberg University, Bamberg Economic Research Group.

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    More about this item

    Keywords

    Minsky Cycles; De-Leveraging; Paradox of Debt; Financial Accelerator; Business Sentiment; Kaleckian Model; Disequilibrium Model;
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