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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
    as

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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. Dean Baker, 2002. "The Run-up in Home Prices: A Bubble," Challenge, Taylor & Francis Journals, vol. 45(6), pages 93-119.
    2. Eric Tymoigne, 2007. "A Hard-Nosed Look at Worsening U.S. Household Finance," Challenge, Taylor & Francis Journals, vol. 50(4), pages 88-111.
    3. Montgomery, Michael R., 1995. "'Time-to-build' completion patterns for nonresidential structures, 1961-1991," Economics Letters, Elsevier, vol. 48(2), pages 155-163, May.
    Full references (including those not matched with items on IDEAS)

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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.

    More about this item

    Keywords

    Keynes; business cycle; system dynamics;

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • 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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