Financial fragility, effective demand and the business cycle

Mark Setterfield

Review of Political Economy, 2004, vol. 16, issue 2, 207-223

Abstract: A shifting equilibrium model of effective demand is constructed, in which the state of long run expectations is non-constant, and is affected by the disappointment of short-run expectations. It is shown that this model gives rise to cumulative expansions/contractions in nominal income. Changes in the financial fragility of households and firms in the course of these expansions/contractions are then allowed for, together with commercial bank reactions to changing financial fragility. It is shown that turning points in the expansions/contractions of nominal income can arise, resulting in a model of aggregate fluctuations in which the business cycle is aperiodic and of no fixed amplitude.

Date: 2004
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DOI: 10.1080/0953825042000183190

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