An investigation into the dynamics of financial catastrophe

Abstract

The paper captures the dynamics of interaction between the real and the nancial sector in a model of endogenous credit that exhibits multiple steady states and generates phase transitions with catastrophic abrupt- ness. This resembles aspects of nancial meltdowns witnessed in global capital markets in recent times. The paper also explains how nan- cial crisis assume dierent characteristics under alternative monetary arrangements in regimes of prot- and wage-led growth and, concludes with linking the analysis to the recent nancial crises in the United States and in the Eurozone.