A two-sector model of the business cycle: a preliminary analysis¤

In this paper a two-sector dynamic model of business ‡uctuations is presented. It is a disequilibrium dynamic model with two laws of evolution (dynamic laws) built into it: prices of commodities change according to the market disequilibrium of supply and demand, while quantities change according to the stock disequilibrium and the shifting of the degree of utilization of productive capacity away from its target value. Investment by ...rms is modelled by a nonlinear accelerator. Non linearity in the investment function makes the equilibria of the model unstable and causes growing disproportionalities between the two sectors; business ‡uctuations are the outcome of the switching ¤The authors acknowledge their debt to R. Scazzieri for enlightening discussions and valuable suggestions, to S. Zamagni, G. Candela, and F. Zagonari for comments and encouragement. Preliminary drafts of the paper have been persented at the 2 European Summer School in Structural Change and Economic Dynamic held in Selwin College, July 1996, at the XX Convegno Annuale del’AMASES held in Urbino, September 1996, at the Convegno CNR sulle Teorie Generali in Economia held in Trento, June 1997; the authors wishes to thank all participants to the discussions for observations and constructive criticism. yPiazza Scaravilli, 2 I-40126 BOLOGNA ITALY tel +39 051 209 8664 fax +39 051 209 4367 e-mail [email protected] zViale Quirico Filopanti, 5 I-40126 BOLOGNA ITALY tel +39 051 209 4364 fax +39 051 209 4367 e-mail [email protected]