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Keynes’ Business Cycle: Animal Spirits and Crisis

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  • John Harvey

    ()
    (Department of Economics, Texas Christian University)

Abstract

Today, we are in the midst of the worst economic crisis since the Great Depression. Recovery has not been swift, and policymakers and citizens throughout the globe have turned to economists for answers. While in the mainstream, the general opinion is that the collapse was unpredictable and caused by exogenous events (i.e., poor policy decisions), those in the Post-Keynesian school not only raised voices of concern well before the crisis struck, but they have argued consistently that the problems we face are systemic. They base this conclusion on theories developed by John Maynard Keynes. This paper attempts to determine the primary factors creating instability by building and then analyzing a system dynamics model of Keynes’ explanation of the business cycle. It shows that the financial sector is key and that while, of course, exogenous factors can play critical roles, they are unnecessary: cycles are generated endogenously.

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File URL: http://www.econ.tcu.edu/RePEc/tcu/wpaper/wp10-03.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by Texas Christian University, Department of Economics in its series Working Papers with number 201003.

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Length: 37 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:tcu:wpaper:201003

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Web page: http://www.econ.tcu.edu/
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Keywords: Keynes; business cycle; system dynamics;

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  1. Dean Baker, 2002. "The Run-up in Home Prices: A Bubble," Challenge, M.E. Sharpe, Inc., vol. 45(6), pages 93-119, November.
  2. Montgomery, Michael R., 1995. "'Time-to-build' completion patterns for nonresidential structures, 1961-1991," Economics Letters, Elsevier, vol. 48(2), pages 155-163, May.
  3. Eric Tymoigne, 2007. "A Hard-Nosed Look at Worsening U.S. Household Finance," Challenge, M.E. Sharpe, Inc., vol. 50(4), pages 88-111, August.
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