Cool Models of Business Cycles EC6012 2009 Lecture Notes

Economists have been coming up with business cycle models since the time of Smith, Ricardo, and Marx [5]. Most modern economists take Samuelson’s Multiplier-Accelerator model [12], and Keynes’ model of deficient demand as the starting points for modern policy debates, with the Real Business Cycle model and it’s ‘computable’ variant, the Dynamic Stochastic General Equilibrium model (DSGE), the modern tool for policy evaluation [15]. Other business cycle models develop from either behavioural or stock-flow consistent foundations [7, 1]. We’ll explore one of each in this lecture. Specifically we’ll look at four models which attempt to generate the cycles we see in modern economic life. Some of these models are more useful than others, some are more used than others. All are cool, for different reasons, hence the title of the lecture. You’ll see why as we go through them. First, we’ll look at the famous multiplier-accelerator model, then at the famous predator-prey model of [9, 2], at Minsky’s [10] financial fragility model, and finally at an open economy DSGE model by Obstfeld and Rogoff [11]. We’ll finish off with some numerical examples, and some guides for the problem set which will get you to read some of the literature around these models. ∗Department of Economics, Kemmy Business School, University of Limerick, Ireland. Email: [email protected], www.stephenkinsella.net