Goodwin and Household Credit-Driven Cycles

We examine the potential linkages between two empirically-observed patterns in aggregate macroeconomic data. The cyclical relationship between economic activity and the labor share—referred to as the Goodwin pattern—has been well documented by a number of papers in the literature (Barrales-Ruiz et al., 2021). On the other hand, some recent studies have uncovered evidence of a cyclical relationship between economic activity and household credit, suggesting that household debt is a critical driver of macroeconomic cycles (Mian et al., 2017). We study these two cyclical processes in combination with one another. We illustrate the empirical plausibility of a pseudo- Goodwin cycle in which fluctuations in household indebtedness create the appearance of a Goodwin cycle, even in the absence of any causal effects between demand and distribution. Therefore, we argue that it is necessary to consider debt, demand, and distribution as essential elements in an interrelated system. Our analysis of such a three-dimensional system using both U.S. data and a panel of 30 advanced economies suggests that debt is a more important driver of economic activity over the business cycle than income distribution.