WS 2006/07 3. Business Cycle Theories (Survey) • History: pre-Keynesian vs. modern theories • Principal: real vs. monetary theories • Stability: endogenous instability vs. exogenous shocks („rocking chair“) • Price flexibility: new Keynesian vs. new classical Macroeconomics KuB 4 1 U van Suntum, Vorlesung KuB 1
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WS 2006/07 3. Business Cycle Theories (Survey) History: pre-Keynesian vs. modern theories Principal: real vs. monetary theories Stability: endogenous instability.
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WS 2006/07
3. Business Cycle Theories (Survey)
• History: pre-Keynesian vs. modern theories
• Principal: real vs. monetary theories
• Stability: endogenous instability vs. exogenous shocks („rocking chair“)
• Price flexibility: new Keynesian vs. new classical Macroeconomics
KuB 4 1U van Suntum, Vorlesung KuB 1
WS 2006/07
monetary real
endogenous • Ralph Hawtrey
(1879-1975):
Instability of v
• Knut Wicksell
(1851-1926):
interest rate spread
•F.A. von Hayek
(1899-1922):
excess investment
•M. Woodford: dynamic stochastic general
equilibrium model (DSGE)
• E. Lederer, R. Malthus, K. Marx: underconsumption
• Albert Aftalion (1874-1956), Artur Spiethoff (1873-1957), Gustav Cassel (1866-1945):
• Stimulus of initial interest rate decline unclear
• However: leverage effect was relevant in recent financial crisis
KuB 3.1 9KuB 4 9U van Suntum, Vorlesung KuB 9
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Monetary over-investment theory (Knut Wicksell 1922, F.A. von Hayek 1934 )
upswing downswing
inat
imon
imon
S
I
S + d(M/P)
S + d(M/P)
S
I
KuB 3.1 10KuB 4 10
Interest rate spread causal for disparity between investment and consumption goods
U van Suntum, Vorlesung KuB 10
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Criticism on Wicksell`s theory
• Stimulus of initial interest rate spread unclear
• Neglect of real effects (e.g. accelerator)
• However: interest rate spread was also relevant in recent crisis
KuB 3.1 11KuB 4 11U van Suntum, Vorlesung KuB 11
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Critisicm:
• real wage increase by technical is progress neglected• turning points are not sufficiently explained • one sided theory, no formal exposition• export demand neglected
Theories of under-consumption
(Lauderdale, Malthus, Lederer)
KuB 3.1 12KuB 4 12
• technical progress and capital accumulation
• pressure on wages and rising unemployment
• sales crisis and depression
U van Suntum, Vorlesung KuB 12
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Criticism:• cause of initial rise in aggregate demand?• no formal exposition• one sided
Accelerator effect:
• K/GDP = 300/100• d = 10% => D = 30• suppose demand rises at 10% in t1 => I1 = 60 + 100% • I2 = 33 -45%
=> extreme instability
Non-monetary theory of excess investment (Aftalion u.a.)
Aggregate Demand
Investment
KuB 3.1 13KuB 4 13U van Suntum, Vorlesung KuB 13
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Accelerator effect in East German Housing Market
Housing stock
./.outs(99)
adds(1)
Demand(100)
Housingstock
./.outs(99)
adds(11)
Demand(110)
• increase in aggregate demand by 10% => rise in investment by 1100% !• after completed construction of new houses drop in investment