An Endogenous Mechanism of Business Cycles

Kroujiline, Dimitri; Gusev, Maxim; Ushanov, Dmitry; Sharov, Sergey V.; Govorkov, Boris

doi:10.2139/ssrn.3135139

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2021

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“…One could introduce, as in e.g. [51][52][53], the impact of macroeconomic news as an extra contribution to the argument of the tanh function. This would describe how the consumer confidence index is further modulated by some exogenous shocks, but we leave such an extension for future work.…”

Section: The Consumption Ratementioning

confidence: 99%

Economic Crises in a Model with Capital Scarcity and Self-Reflexive Confidence

Morelli,

Naumann-Woleske,

Benzaquen

et al. 2021

Preprint

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In the General Theory, Keynes remarked that the economy's state depends on expectations, and that these expectations can be subject to sudden swings. In this work, we develop a multiple equilibria behavioural business cycle model that can account for demand or supply collapses due to abrupt drops in consumer confidence, which affect both consumption propensity and investment. We show that, depending on the model parameters, four qualitatively different outcomes can emerge, characterised by the frequency of capital scarcity and/or demand crises. In the absence of policy measures, the duration of such crises can increase by orders of magnitude when parameters are varied, as a result of the "paradox of thrift". Our model suggests policy recommendations that prevent the economy from getting trapped in extended stretches of low output, low investment and high unemployment.

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Section: The Consumption Ratementioning

confidence: 99%