Rebuilding macroeconomic theory from Keynes’ original ideas – a minimal model of the economy with confidence and debt causing business cycles

We present a minimal (‘toy’) model of an economy as a simple set of equations modelling confidence, consumption, price, investment and debt. Behaviour in the model is grounded in simple heuristics that use available recent information and ‘animal spirits’ instead of complex intertemporal optimization. It is shown that such a model can endogenously generate business cycles where booms are driven by high spirits and credit, while recessions are driven by saving to reduce accumulated debt. We discuss the potential of this minimal model as the basis of a more elaborate core economic model exhibiting cycles and non equilibrium dynamic behaviour