A Monetary Model of Long Cycles

Abstract

The explanations of the long cycle phenomenon in the real economy is searched in the paper by introducing monetary factors into a neo-Keynesian type of growth model a la Harrod, Kaldor and Kalecki. A cumulatively unstable growth process is turned into a long cycle through monetary intervention: during a long upswing, the monetary policy stance, which is an endogenous variable in the model, is turning less and less accommodative along with accelerating inflation. “Sadistic” monetary squeeze finally turns the long upswing into a long downswing with increasing unemployment, disinflation and finally deflation. The simpler version of the model makes use of the quantity equation of money and nominal interest rate to link the monetary sector to the real economy. In the more complicated model variant, the effects of monetary policy are channelled into the real economy via real interest rates and investments. Both model variants are based on non-linear differential equations, the solutions of which utilize either the known properties of the Lotka-Volterra system or so-called Liapunov’s first method for almost linear systems.

• ISSN: 0357-9603
• ISBN: 951-9281-48-7
• Publication in PDF-format