The Simple Analytics of Debt-Driven Business Cycles

Thomas Palley

Working Papers from Political Economy Research Institute, University of Massachusetts at Amherst

Abstract: This paper explores the economics of debt-driven business cycles, distinguishing between Keynesian and new Keynesian approaches. Keynesians emphasize the impact of borrowing and debt on aggregate demand (AD), whereas new Keynesians emphasize the impact on aggregate supply (AS). A unique Keynesian feature is emphasis on debtor – creditor debt-service income transfers. Business cycles result from two mechanisms. One is the multiplier – accelerator AD mechanism. The second is a predator – prey mechanism whereby increased income feeds the level of debt, but the level of debt preys on the level of income. Both the Keynesian and new Keynesian approaches are logically coherent, but the latter is at odds with the stylized facts of business cycles.

Keywords: debt; debt service burdens; business cycle; multiplier – accelerator; predator – prey model (search for similar items in EconPapers)
JEL-codes: E3 E5 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-pke
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Chapter: The Simple Analytics of Debt-driven Business Cycles (2013)
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