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Beautiful cycles: A theory and a model implying a curious role for interest

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  • Gross, Marco

Abstract

Where do economic cycles come from? This paper contemplates an utmost minimalistic model and an underlying theory that rest on two assumptions that let them emerge endogenously: (1) the presence of interest-bearing debt, and (2) a degree of downward nominal wage rigidity. Despite its parsimony, the model generates well-behaved, self-evolving limit cycles and replicates six essential empirical facts: (1) booms are long, while recessions short-lived; (2) leverage is procyclical; (3) firm profit and wage shares are countercyclical and procyclical, respectively; (4) Phillips curves are downward-sloping and convex, and Okun’s law is replicated; (5) default cascades arise at the turning points to recessions; (6) lending spreads are countercyclical. One can refer to the model as being of a dynamic stochastic general disequilibrium (DSGD) kind.

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  • Gross, Marco, 2022. "Beautiful cycles: A theory and a model implying a curious role for interest," Economic Modelling, Elsevier, vol. 106(C).
    • Handle: RePEc:eee:ecmode:v:106:y:2022:i:c:s0264999321002674
    DOI: 10.1016/j.econmod.2021.105678
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    More about this item

    Keywords

    Business and financial cycles; Macro-financial linkages; Endogenous money;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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