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The Simple Analytics of Debt-Driven Business Cycles

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Author Info
Thomas I Palley
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.


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Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp200.

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Date of creation: 2009
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Handle: RePEc:uma:periwp:wp200

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Related research
Keywords: debt; debt service burdens; business cycle; multiplier – accelerator; predator – prey model;

Find related papers by JEL classification:
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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  1. Amitava Krishna Dutt, 2006. "Maturity, Stagnation And Consumer Debt: A Steindlian Approach," Metroeconomica, Blackwell Publishing, vol. 57(3), pages 339-364, 07. [Downloadable!] (restricted)
  2. Peter Skott, 2008. "Theoretical and empirical shortcomings of the Kaleckian investment function," Working Papers 2008-11, University of Massachusetts Amherst, Department of Economics. [Downloadable!]
  3. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier. [Downloadable!] (restricted)
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  4. Palley, Thomas I., 1999. "General disequilibrium analysis with inside debt," Journal of Macroeconomics, Elsevier, vol. 21(4), pages 785-803. [Downloadable!] (restricted)
  5. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
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  6. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February. [Downloadable!] (restricted)
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  7. Palley, Thomas I, 1996. "Inside Debt, Aggregate Demand, and the Cambridge Theory of Distribution," Cambridge Journal of Economics, Oxford University Press, vol. 20(4), pages 465-74, July.
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This page was last updated on 2009-12-23.

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