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The Simple Analytics of Debt-Driven Business Cycles

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  • Thomas I. Palley

Abstract

This paper explores the economics of debt-driven business cycles, distinguishing between Keynesian and new Keynesian approaches. Keynesians emphasize the impact of borrowing and debt on aggregate demand (AD), whereas new Keynesians emphasize the impact on aggregate supply (AS). A unique Keynesian feature is emphasis on debtor – creditor debt-service income transfers. Business cycles result from two mechanisms. One is the multiplier – accelerator AD mechanism. The second is a predator – prey mechanism whereby increased income feeds the level of debt, but the level of debt preys on the level of income. Both the Keynesian and new Keynesian approaches are logically coherent, but the latter is at odds with the stylized facts of business cycles.

Suggested Citation

  • Thomas I. Palley, 2009. "The Simple Analytics of Debt-Driven Business Cycles," Working Papers wp200, Political Economy Research Institute, University of Massachusetts at Amherst.
    • Handle: RePEc:uma:periwp:wp200
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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