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

Author

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  • Kuriyama, Akira

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.

Suggested Citation

  • Kuriyama, Akira, 2011. "A partial differential equation to express a business cycle :an implication for Japan's law interest policy," MPRA Paper 35166, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:35166
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    File URL: https://mpra.ub.uni-muenchen.de/35166/1/MPRA_paper_35166.pdf
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    More about this item

    Keywords

    BusinessCycle; Partial Differential Equation; Japan; Monetary Policy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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