Economic Crises in a Model with Capital Scarcity and Self-Reflexive Confidence

17 Pages Posted: 24 Sep 2021

See all articles by Federico Morelli

Federico Morelli

Sorbonne University

Karl Naumann-Woleske

Ecole Polytechnique, Palaiseau; New Approaches to Economic Challenves (NAEC) Unit at OECD

Michael Benzaquen

Capital Fund Management; Ecole Polytechnique, Palaiseau

Marco Tarzia

Université Paris VI Pierre et Marie Curie

Jean-Philippe Bouchaud

Capital Fund Management

Date Written: September 20, 2021

Abstract

In the General Theory, Keynes remarked that the economy's state depends on expectations, and that these expectations can be subject to sudden swings. In this work, we develop a multiple equilibria behavioural business cycle model that can account for demand or supply collapses due to abrupt drops in consumer confidence, which affect both consumption propensity and investment. We show that, depending on the model parameters, four qualitatively different outcomes can emerge, characterised by the frequency of capital scarcity and/or demand crises. In the absence of policy measures, the duration of such crises can increase by orders of magnitude when parameters are varied, as a result of the ``paradox of thrift''. Our model suggests policy recommendations that prevent the economy from getting trapped in extended stretches of low output, low investment and high unemployment.

Keywords: Macroeconomics, Business Cycles, Confidence, Behavioral Economics, DSGE

JEL Classification: E22, E32, E24, E23, E44, E03

Suggested Citation

Morelli, Federico and Naumann-Woleske, Karl and Benzaquen, Michael and Benzaquen, Michael and Tarzia, Marco and Bouchaud, Jean-Philippe, Economic Crises in a Model with Capital Scarcity and Self-Reflexive Confidence (September 20, 2021). Available at SSRN: https://ssrn.com/abstract=3927107 or http://dx.doi.org/10.2139/ssrn.3927107

Federico Morelli

Sorbonne University ( email )

UFR 927, 4 Place Jussieu
Paris, F-75252
France

Karl Naumann-Woleske (Contact Author)

Ecole Polytechnique, Palaiseau ( email )

Route de Saclay
Palaiseau, 91128
France

New Approaches to Economic Challenves (NAEC) Unit at OECD ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

Michael Benzaquen

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

Ecole Polytechnique, Palaiseau ( email )

Route de Saclay
Palaiseau, 91128
France

Marco Tarzia

Université Paris VI Pierre et Marie Curie ( email )

175 Rue du Chevaleret
Paris, 75013
France

Jean-Philippe Bouchaud

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France
+33 1 49 49 59 20 (Phone)

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