Macrodynamics of debt-financed investment-led growth with interest rate rules

Abstract

This paper demonstrates the diverse dynamical possibilities arising out of a simple macroeconomic model of debt-financed investment-led growth in the presence of interest rate rules. We show possibilities of convergence to steady state, growth cycles around it as well as various complex dynamics. We investigate whether, given this framework, the financial sector can provide endogenous bounds to an otherwise unstable system. The effectiveness of monetary policy in the form of a Taylor-type interest rate rule targeting capacity utilization is examined under this context