A partial differential equation to express a business cycle:an implication for Japan's law interest policy

Akira Kuriyama

MPRA Paper from University Library of Munich, Germany

Abstract: This study presents an equation of income derived from the Keynesian IS curve and the consumption Euler equation that explains the business cycle. Drawing on multi-period data from Japan, the model confirms the conventional wisdom that the appropriate policy response to an inflationary gap is to increase the interest rate when economic growth accelerates and decrease it when growth decelerates. However, the model indicates that to stabilize a deflationary gap, policymakers should decrease the interest rate when growth accelerates and increase it when growth decelerates. This prescription defies generations of conventional wisdom but fits the historical data remarkably well.

Keywords: BusinessCycle; Partial Differential Equation; Japan; Monetary Policy (search for similar items in EconPapers)
JEL-codes: C22 E32 E52 (search for similar items in EconPapers)
Date: 2011-03-14
New Economics Papers: this item is included in nep-mac
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