It is probably not unfair to say that Nonlinear Dynamics (NLD) has not had a major impact on the development of modern economic theory. In fact one may even be tempted to add that, until very recently, it was either an unfamiliar tool for the mathematical economist or one whose implications were often disregarded as nonrelevant to the purposes of the research. Dynamical Systems theory appeared for a while in the background of the studies on the stability of the tâtonnement process (see Hahn [1982]) and on optimal growth and turnpike (see McKenzie [1986]), but never really got on the stage.
During the 1950s and 1960s the only well developed effort to use nonlinear techniques in the study of dynamic economic processes is associated to the name of Richard Goodwin (see Goodwin [1982] for a collection of the relevant essays). He put forward the idea of illustrating persistent, deterministic oscillations within a multiplier-accelerator setup by means of a limit cycle for a nonlinear, two-dimensional flow. His research effort toward an endogenous explanation of economic fluctuations motivated a few others contributions within the Keynesian and Cambridge (UK) tradition, but was never able to take off and influence the whole of the profession. In fact the late 1960s and 1970s witnessed an almost complete unanimity on the use of linear stochastic models in order to understand business cycles.
The finance literature has traditionally offered two theories of capital structure. In the tradeoff theory, firms pick target leverage by weighing the benefits and costs of an additional dollar of debt. The benefits of debt include the tax deductibility of interest and the reduction of the free cash flow problem (Jensen (1986)). The costs of debt include the expected financial distress costs and the costs arising from the agency conflict between shareholders and bondholders. At target leverage, the benefit of the marginal dollar of debt exactly equals the cost.
In economics, the effects of developing financial markets on economic growth have always been an important issue in ever since. In international literature, although many studies have been done since 1900s to observe the relation between financial developing and economic growth, each study had found meaningful results only for its own period. Even though economists have accepted effects of financial developing on economic growth, they have not had the same idea about the direction of causality, which means whether financial development causes economic growth or economic growth causes financial development. For instance, Hicks (1969) and Schumpeter (1912) support that financial developing cause financial growth. In contrast to this opinion, Robinson (1952) discusses that in the existence of same type of financial regulations, economic growth creates a demand and financial system gives an automatic response to this demand which causes financial system development (Levine,1997).
According to some economists, financial developing does not explain economic growth well. Moreover, this relationship is a result of weak and unpowerful effect of financial system on economic growth. However, some economists, this relationship is a result of economies, which completed their development cycle in financial markets with a strong financial system, have bigger growth rate.
