Price Flexibility and Debt Dynamics in a High Order AS-AD Model

In this paper we reconsider extensions and modifications of earlierwork on a disequilibrium model of AS-AD growth. Our dynamicmodel exhibits more or less sluggishly adjusting prices and quantities,Keynesian demand rationing and fluctuating capacity utilization forboth labor and capital. Firms use debt (and pure profits) to financetheir investment expenditurcs. We first prove that the resulting 7Dcore dynamics are convergent broadly speaking for low adjustmentspeeds. We then demonstrate partly analytically and partly numericallythat their interior steady state will lose asymptotic stability byway of Hopf bifurcations when relevant adjustment speeds are madesufficicntly large. This holds in particular for debt deflation, wherefalling price levels cause increasing real debt, falling investment andshrinking economic activity that deepens the dellation already underway. This instability result even occurs in the case where accompanyingreal wage increases would support economic stability.