Review of Behavioral Economics > Vol 9 > Issue 4

Capital Demand Driven Business Cycles: Mechanism and Effects

Karl Naumann-Woleske, Chair of Econophysics and Complex Systems and LadHyX, UMR CNRS 7646, Ecole Polytechnique, and New Approaches to Economic Challenges Unit (NAEC), OECD, France, karl.naumann@ladhyx.polytechnique.fr , Michael Benzaquen, Chair of Econophysics and Complex Systems and LadHyX, UMR CNRS 7646, Ecole Polytechnique, and Capital Fund Management, France, michael.benzaquen@polytechnique.edu , Maxim Gusev, LGT Capital Partners, Switzerland, maxim.gusev@lgtcp.com , Dimitri Kroujiline, LGT Capital Partners, Switzerland, dimitri.kroujiline@lgtcp.com
 
Suggested Citation
Karl Naumann-Woleske, Michael Benzaquen, Maxim Gusev and Dimitri Kroujiline (2022), "Capital Demand Driven Business Cycles: Mechanism and Effects", Review of Behavioral Economics: Vol. 9: No. 4, pp 333-377. http://dx.doi.org/10.1561/105.00000162

Publication Date: 02 Nov 2022
© 2022 K. Naumann-Woleske, M. Benzaquen, M. Gusev and D. Kroujiline
 
Subjects
 
Keywords
JEL Codes: E22, E32, E19, D21, D51, D84, D92
Business cycleseconomic growthinteractions-based modelsdynamical systemslimit cyclecoherence resonance
 

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In this article:
1. Introduction 
2. The Dynamic Solow Model 
3. Two Limiting Cases 
4. Business Cycles and Long-Term Growth in the General Case 
5. Conclusion 
Appendices 
References 

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.

DOI:10.1561/105.00000162