An Endogenous Mechanism of Business Cycles

54 Pages Posted: 6 Mar 2018 Last revised: 28 Sep 2019

See all articles by Dimitri Kroujiline

Dimitri Kroujiline

LGT Capital Partners

Maxim Gusev

IBC Quantitative Strategies

Dmitry Ushanov

Moscow State University, Department of Mechanics and Mathematics

Sergey Sharov

N.I. Lobachevsky State University, Advanced School of General & Applied Physics

Boris Govorkov

IBC Quantitative Strategies

Date Written: March 5, 2018

Abstract

This paper suggests that business cycles may be a manifestation of coupled real economy and stock market dynamics and describes a mechanism that can generate economic fluctuations consistent with observed business cycles. To this end, we seek to incorporate into the macroeconomic framework a dynamic stock market model based on opinion interactions (Gusev et al., 2015). We derive this model from microfoundations, provide its empirical verification, demonstrate that it contains the efficient market as a particular regime and establish a link through which macroeconomic models can be attached for the study of real economy and stock market interaction. To examine key effects, we link it with a simple macroeconomic model (Blanchard, 1981). The coupled system generates nontrivial endogenous dynamics, which exhibit deterministic and stochastic features, producing quasiperiodic fluctuations (business cycles). We also inspect this system’s behavior in the phase space. The real economy and the stock market coevolve dynamically along the path governed by a stochastically-forced dynamical system with two stable equilibria, one where the economy expands and the other where it contracts, resulting in business cycles identified as the coherence resonance phenomenon. Thus, the incorporation of stock market dynamics into the macroeconomic framework, as presented here, allows the derivation of realistic behaviors in a tractable setting.

Keywords: business cycle, long-term growth, economy-market interaction, agent-based model, quasiperiodic oscillations, coherence resonance

JEL Classification: E32, E44, G02, G14

Suggested Citation

Kroujiline, Dimitri and Gusev, Maxim and Ushanov, Dmitry and Sharov, Sergey and Govorkov, Boris, An Endogenous Mechanism of Business Cycles (March 5, 2018). Available at SSRN: https://ssrn.com/abstract=3135139 or http://dx.doi.org/10.2139/ssrn.3135139

Dimitri Kroujiline (Contact Author)

LGT Capital Partners ( email )

Pfa ̈ffikon
Switzerland

Maxim Gusev

IBC Quantitative Strategies

Ta ̈rnaby
Sweden

Dmitry Ushanov

Moscow State University, Department of Mechanics and Mathematics

GSP-2, Leninskie Gory
Moscow, 119992
Russia

Sergey Sharov

N.I. Lobachevsky State University, Advanced School of General & Applied Physics

23 Prospekt Gagarina
Nizhni Novgorod, 603950
Russia

Boris Govorkov

IBC Quantitative Strategies

Ta ̈rnaby
Sweden

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
70
Abstract Views
475
rank
369,654
PlumX Metrics