An empirical test of a fundamental Harrod-Kaldor business cycle model

Reiner Franke

Structural Change and Economic Dynamics, 2022, vol. 60, issue C, 1-14

Abstract: Going back to the roots of modern business cycle modelling, the paper advances a macroeconomic model of a most elementary (and now largely forgotten) cycle mechanism within a growth framework. Essentially, it combines a nonlinear Harrodian instability for a business sentiment index with Harrod’s and Kaldor’s old idea that firms tend to reduce investment if they have already built up high capacities relative to their assessment of the normal market potential. For greater realism, a previous version is augmented by a delay in the capital growth rate and by in general three random shock processes. This makes it possible to estimate the model on quarterly US data of utilization and a certain capital ratio. The focus is on an inquiry into the model’s goodness-of-fit, for which the method of simulated moments is a fruitful technique. Here, 14 fairly ambitious summary statistics that the model should try to reproduce allow a detailed diagnosis of its merits and demerits. The results are sufficiently encouraging and form a sound basis for stepwise extensions of the model in future work, or for refinements in the estimation procedure.

Keywords: Harrodian instability; Capacity effects; Nonlinear sentiment adjustments; Method of simulated moments (search for similar items in EconPapers)
JEL-codes: C15 C52 D21 E12 E32 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:streco:v:60:y:2022:i:c:p:1-14

DOI: 10.1016/j.strueco.2021.11.001

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