Essays in business cycle theory

Abstract

The first essay discusses and critiques different exogenous business cycle theories (Real Business Cycles, Lucas,) on both the analytical and foundational grounds. The essay argues that the recent surge in interest in business cycles reopens the question posed earlier in the century on the incorporation of business cycles into economic theory. The essay shows that he modern exogenous theories take the Frischian impulse and propagation mechanisms dichotomy and attempts to reduce it further into an impulse-only theory of the business cycle. The Frischian view of impulses as reinforcement mechanisms that prevent the cycle from dying down is replaced by a system that supposedly generates cycles upon impulse only. The second essay develops a nonlinear model of the business cycle based on Kalecki''s 1935 linear model. The nonlinearity is assumed to rise from the effect of capital stock on profitability. The more capital stock is available, the more intense the negative effect of the capital stock on investment. By applying both the averaging method and numerical simulations, solutions representing limit cycle solutions are found. The model is extended to take into account the existence of spatial economic interactions. A two-region economy is considered in which interregional investment flows couple the region-specific business cycles. Numerical simulations show that the correlation and regularity in the occurrence of downturns and upturns between economic spaces depend critically on the time delays involved. The third essay develops a mathematical model of the business cycle based on Marx''s theory of capital accumulation and the reserve army of labor. The assumed functional relationship between wages and profits satisfies the recent theoretical attempts at integrating the Kaleckian-Keynesian demand-driven economy with the Classical-Marxian class conflict driven-economy. The labor market is modeled according to the reserve army hypothesis; the wage rate depends on the level of unemployment in a dynamic Walrasian market. The model is then solved numerically producing limit cycle solutions which represent persistent fluctuations in the economy.