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A Keynesian Business Cycle

In: Nicholas Kaldor and Mainstream Economics

Author

Listed:
  • R. H. Day
  • T. Y. Lin

Abstract

The Keynesian business cycle follows a straight forward scenario. Begin in an expansion with a rising volume of transactions. Under tight money, interest rates rise. If they rise sharply enough investment is eventually reduced. If this depressing effect is strong enough, a recession is induced by the corresponding fall in aggregate demand; unemployment and excess capacity increase, the transaction demand for money decreases, and the interest rate falls. If the latter influence is sharp enough investment may overcome the depressing influence of excess capacity and low profits. Recovery sets in and the stage is set for a repetition of the story. A dramatic example of such interactions occurred in the early 1980s when the price level was brought under control with tight money policy; interest rates reached unprecedented levels and investment in some sectors came to a virtual standstill. When interest rates eventually fell, the impact on new housing starts and investment was immediate and substantial.

Suggested Citation

  • R. H. Day & T. Y. Lin, 1991. "A Keynesian Business Cycle," Palgrave Macmillan Books, in: Edward J. Nell & Willi Semmler (ed.), Nicholas Kaldor and Mainstream Economics, chapter 16, pages 281-305, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-10947-0_16
    DOI: 10.1007/978-1-349-10947-0_16
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    Citations

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    Cited by:

    1. Willi Semmler, 2011. "Asset Prices, Booms and Recessions," Springer Books, Springer, number 978-3-642-20680-1, December.
    2. Ferri, Piero & Greenberg, Edward & Day, Richard H., 2001. "The Phillips curve, regime switching, and the NAIRU," Journal of Economic Behavior & Organization, Elsevier, vol. 46(1), pages 23-37, September.
    3. Sasakura, Kazuyuki, 1995. "Political economic chaos?," Journal of Economic Behavior & Organization, Elsevier, vol. 27(2), pages 213-221, July.
    4. Willi Semmler & Levent Koçkesen, 2017. "Liquidity, Credit and Output: A Regime Change Model and Empirical Estimations," Working Papers 1730, New School for Social Research, Department of Economics.
    5. K. Vela Velupillai, 2004. "Hicksian Visions and Vignettes on (Non-Linear) Trade Cycle Theories," Department of Economics Working Papers 0407, Department of Economics, University of Trento, Italia.

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