Unemployment, income distribution and debt-financed investment in a growth cycle model

As recent experience suggests, the most significant economic fluctuations are those that combine real and financial factors. This paper works out a simple model that couples a version of Goodwin's (1967) growth cycle model of real fluctuations with insights drawn from a model of financial fluctuations based on Minsky's financial instability hypothesis (Vercelli, 2000; Sordi and Vercelli, 2006, 2012). The model suggested substantially modifies that of Keen (1995), who combined insights from Goodwin and Minsky within a model of fluctuating growth. In the real part of the model we introduce the possibility of disequilibrium in the goods market and formalize a mechanism of output adjustment based on the conventional dynamic multiplier. The model so obtained may exhibit persistent dynamics and provide insights to enable better understanding of the nature of real-world fluctuations. & 2014 Elsevier B.V. All rights reserved.