A Monetary Model of Long Cycles

Working Papers 36 Korpinen Pekka

The explanation 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, Kaldon and Kalecki. A cumulatively unstable growth process is turned into a long cycle through monetary invervention: during a long upswing, the monetary policy stance, which is an endogenous variable in the model, is turning less and less accommadative along with accelerating inflation. “Sadistic” monetary squuze 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 monetry policy are channelled into the real economy via real interest rates and investments, 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.

ISBN: 951-9281-48-7
ISSN: 0357-9603