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An empirical test of a fundamental Harrod-Kaldor business cycle model

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  • Franke, Reiner

Abstract

Going back to the roots of modern business cycle modelling, the paper advances a macroeconomic model of a most elementary (and now largely forgotten) cycle mechanism within a growth framework. Essentially, it combines a nonlinear Harrodian instability for a business sentiment index with Harrod’s and Kaldor’s old idea that firms tend to reduce investment if they have already built up high capacities relative to their assessment of the normal market potential. For greater realism, a previous version is augmented by a delay in the capital growth rate and by in general three random shock processes. This makes it possible to estimate the model on quarterly US data of utilization and a certain capital ratio. The focus is on an inquiry into the model’s goodness-of-fit, for which the method of simulated moments is a fruitful technique. Here, 14 fairly ambitious summary statistics that the model should try to reproduce allow a detailed diagnosis of its merits and demerits. The results are sufficiently encouraging and form a sound basis for stepwise extensions of the model in future work, or for refinements in the estimation procedure.

Suggested Citation

  • Franke, Reiner, 2022. "An empirical test of a fundamental Harrod-Kaldor business cycle model," Structural Change and Economic Dynamics, Elsevier, vol. 60(C), pages 1-14.
    • Handle: RePEc:eee:streco:v:60:y:2022:i:c:p:1-14
    DOI: 10.1016/j.strueco.2021.11.001
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    References listed on IDEAS

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    Cited by:

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    2. Wildauer, Rafael & Kohler, Karsten & Aboobaker, Adam & Guschanski, Alexander, 2023. "Energy price shocks, conflict inflation, and income distribution in a three-sector model," Energy Economics, Elsevier, vol. 127(PB).

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    More about this item

    Keywords

    Harrodian instability; Capacity effects; Nonlinear sentiment adjustments; Method of simulated moments;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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