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The great moderation and "falling off a cliff": Neo-Kaldorian dynamics

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  • Devine, James G.

Abstract

Following the broad outlines of Kaldor (1940), we develop a simple non-convex Keynesian macroeconomic model. It has two stable short-run equilibria, achieved by expectations adjustment; shifting curves in the medium run can cause a jump from high employment equilibrium to stagnation. Such a leap can arise from endogenous declines in the demand/debt ratio occurring after persistent periods of high employment (cf. [Minsky, 1982] and [Kalecki, 1933]). We thus provide an explanation of the U.S. economy "falling off a cliff" - perhaps as seen during 2007-2009 - as being due to the "Great Moderation" of 1985-2006; this interpretation is made more plausible by reference to empirical data. The model also allows for milder fluctuations. The model's asymmetries suggest the need for "pump-priming" by policy-makers to allow recovery after a steep recession. We use a synthesis of the rational and adaptive theories of expectation determination.

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  • Devine, James G., 2011. "The great moderation and "falling off a cliff": Neo-Kaldorian dynamics," Journal of Economic Behavior & Organization, Elsevier, vol. 78(3), pages 366-373, May.
    • Handle: RePEc:eee:jeborg:v:78:y:2011:i:3:p:366-373
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    References listed on IDEAS

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    1. N. Kaldor, 1971. "A Comment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(1), pages 45-46.
    2. Varian, Hal R, 1979. "Catastrophe Theory and the Business Cycle," Economic Inquiry, Western Economic Association International, vol. 17(1), pages 14-28, January.
    3. K. Vind, 1971. "Comment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(1), pages 115-115.
    4. Rosser Jr., J. Barkley, 2007. "The rise and fall of catastrophe theory applications in economics: Was the baby thrown out with the bathwater?," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3255-3280, October.
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