Capital Demand Driven Business Cycles: Mechanism and Effects

51 Pages Posted: 1 Oct 2021

See all articles by Karl Naumann-Woleske

Karl Naumann-Woleske

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

Michael Benzaquen

Capital Fund Management; Ecole Polytechnique, Palaiseau

Maxim Gusev

IBC Quantitative Strategies

Dimitri Kroujiline

LGT Capital Partners

Date Written: September 30, 2021

Abstract

We develop a tractable macroeconomic model that captures dynamic behaviors across multiple timescales, including business cycles. The model is anchored in a dynamic capital demand framework reflecting an interactions-based process whereby firms determine capital needs and make investment decisions on a micro level. We derive equations for aggregate demand from this micro setting and embed them in the Solow growth economy. As a result, we obtain a closed-form dynamical system with which we study economic fluctuations and their impact on long-term growth. For realistic parameters, the model has two attracting equilibria: one at which the economy contracts and one at which it expands. This bi-stable configuration gives rise to quasiperiodic fluctuations, characterized by the economy’s prolonged entrapment in either a contraction or expansion mode punctuated by rapid alternations between them. We identify the underlying endogenous mechanism as a coherence resonance phenomenon. In addition, the model admits a stochastic limit cycle likewise capable of generating quasiperiodic fluctuations; however, we show that these fluctuations cannot be realized as they induce unrealistic growth dynamics. We further find that while the fluctuations powered by coherence resonance can cause substantial excursions from the equilibrium growth path, such deviations vanish in the long run as supply and demand converge.

Keywords: Business Cycles, Economic Growth, Interactions-Based Models, Dynamical Systems, Limit Cycle, Coherence Resonance

JEL Classification: E22, E32, E19, D21, D51, D84, D92

Suggested Citation

Naumann-Woleske, Karl and Benzaquen, Michael and Benzaquen, Michael and Gusev, Maxim and Kroujiline, Dimitri, Capital Demand Driven Business Cycles: Mechanism and Effects (September 30, 2021). Available at SSRN: https://ssrn.com/abstract=3933586 or http://dx.doi.org/10.2139/ssrn.3933586

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

Maxim Gusev

IBC Quantitative Strategies

Ta ̈rnaby
Sweden

Dimitri Kroujiline

LGT Capital Partners ( email )

Pfa ̈ffikon
Switzerland

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
98
Abstract Views
429
rank
344,286
PlumX Metrics