The great moderation and "falling off a cliff": Neo-Kaldorian dynamics

James G. Devine

Journal of Economic Behavior & Organization, 2011, vol. 78, issue 3, 366-373

Abstract: Following the broad outlines of Kaldor (1940), we develop a simple non-convex Keynesian macroeconomic model. It has two stable short-run equilibria, achieved by expectations adjustment; shifting curves in the medium run can cause a jump from high employment equilibrium to stagnation. Such a leap can arise from endogenous declines in the demand/debt ratio occurring after persistent periods of high employment (cf. [Minsky, 1982] and [Kalecki, 1933]). We thus provide an explanation of the U.S. economy "falling off a cliff" - perhaps as seen during 2007-2009 - as being due to the "Great Moderation" of 1985-2006; this interpretation is made more plausible by reference to empirical data. The model also allows for milder fluctuations. The model's asymmetries suggest the need for "pump-priming" by policy-makers to allow recovery after a steep recession. We use a synthesis of the rational and adaptive theories of expectation determination.

Keywords: Macroeconomics; Business; cycles; Economic; fluctuations; Catastrophe; theory; Policy; Depression (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:78:y:2011:i:3:p:366-373

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