Beautiful Cycles: A Theory and a Model Implying a Curious Role for Interest

March 5, 2021

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Format: Chicago

Marco Gross. Beautiful Cycles: A Theory and a Model Implying a Curious Role for Interest, (USA: International Monetary Fund, 2021) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Where do economic cycles come from? This paper contemplates an utmost minimalistic model and underlying theory that rest on two assumptions for letting them emerge endogenously: (1) the presence of interest-bearing debt; and (2) a degree of downward nominal wage rigidity. Despite its parsimony, the model generates well-behaved, self-evolving limit cycles and replicates six essential empirical facts: (1) booms are long- while recessions short-lived; (2) leverage is procyclical; (3) firm profit and wage shares in GDP are counter- and procyclical, respectively; (4) Phillips curves are downward-sloping and convex, and Okun’s law relation is replicated; (5) default cascades arise endogenously at the turning points to recessions; (6) lending spreads are countercyclical. One can refer to the model as being of a Dynamic Stochastic General Disequilibrium (DSGD) kind.

Subject: Financial institutions, Income, Labor, Labor share, Loans, National accounts, Wage rigidity, Wages

Keywords: Business and financial cycles, Business and financial cycles., Firm profits, Full employment, Global, Income, Interest rate, Labor share, Loans, Market power, Money stock, Price inflation, Price Phillips curves, Profit share, Wage rigidity, Wages, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/067
Stock No:

WPIEA2021067
ISBN:

9781513571676
ISSN:

1018-5941

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