Beautiful cycles: A theory and a model implying a curious role for interest

Marco Gross

Economic Modelling, 2022, vol. 106, issue C

Abstract: Where do economic cycles come from? This paper contemplates an utmost minimalistic model and an underlying theory that rest on two assumptions that let them emerge endogenously: (1) the presence of interest-bearing debt, and (2) a degree of downward nominal wage rigidity. Despite its parsimony, the model generates well-behaved, self-evolving limit cycles and replicates six essential empirical facts: (1) booms are long, while recessions short-lived; (2) leverage is procyclical; (3) firm profit and wage shares are countercyclical and procyclical, respectively; (4) Phillips curves are downward-sloping and convex, and Okun’s law is replicated; (5) default cascades arise at the turning points to recessions; (6) lending spreads are countercyclical. One can refer to the model as being of a dynamic stochastic general disequilibrium (DSGD) kind.

Keywords: Business and financial cycles; Macro-financial linkages; Endogenous money (search for similar items in EconPapers)
JEL-codes: E20 E30 E40 E51 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:106:y:2022:i:c:s0264999321002674

DOI: 10.1016/j.econmod.2021.105678

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