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Keynes’ Business Cycle: Animal Spirits and Crisis

Author

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  • John Harvey

    (Department of Economics, Texas Christian University)

Abstract

Today, we are in the midst of the worst economic crisis since the Great Depression. Recovery has not been swift, and policymakers and citizens throughout the globe have turned to economists for answers. While in the mainstream, the general opinion is that the collapse was unpredictable and caused by exogenous events (i.e., poor policy decisions), those in the Post-Keynesian school not only raised voices of concern well before the crisis struck, but they have argued consistently that the problems we face are systemic. They base this conclusion on theories developed by John Maynard Keynes. This paper attempts to determine the primary factors creating instability by building and then analyzing a system dynamics model of Keynes’ explanation of the business cycle. It shows that the financial sector is key and that while, of course, exogenous factors can play critical roles, they are unnecessary: cycles are generated endogenously.

Suggested Citation

  • John Harvey, 2010. "Keynes’ Business Cycle: Animal Spirits and Crisis," Working Papers 201003, Texas Christian University, Department of Economics.
    • Handle: RePEc:tcu:wpaper:201003
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    File URL: http://www.econ.tcu.edu/RePEc/tcu/wpaper/wp10-03.pdf
    File Function: First version, 2010
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    References listed on IDEAS

    as
    1. Eric Tymoigne, 2007. "A Hard-Nosed Look at Worsening U.S. Household Finance," Challenge, Taylor & Francis Journals, vol. 50(4), pages 88-111.
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    3. Wynne Godley & L. Randall Wray, 2000. "Is Goldilocks Doomed?," Journal of Economic Issues, Taylor & Francis Journals, vol. 34(1), pages 201-206, March.
    4. Montgomery, Michael R., 1995. "'Time-to-build' completion patterns for nonresidential structures, 1961-1991," Economics Letters, Elsevier, vol. 48(2), pages 155-163, May.
    5. Dean Baker, 2002. "The Run-up in Home Prices: A Bubble," Challenge, Taylor & Francis Journals, vol. 45(6), pages 93-119.
    6. Wynne Godley, "undated". "Drowning In Debt," Economics Policy Note Archive 00-6, Levy Economics Institute.
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    Cited by:

    1. Panchanan Das, 2015. "Entrepreneurial Impulse, Investment Behavior, and Economic Fluctuations–A VAR Analysis with Indian Data," Asian Development Review, MIT Press, vol. 32(2), pages 1-17, September.
    2. Usman Ghani & Md Kamal Hossain, 2023. "The Role and Importance of Liquidity Preference, Marginal Efficiency of Capital, and Marginal Propensity to Consume in Keynes's General Theory," International Journal of Science and Business, IJSAB International, vol. 20(1), pages 58-70.

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    More about this item

    Keywords

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    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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