Cycles: Empirics and the Supermultiplier Theory

The demand-led supermultiplier growth model proposes that business investment is induced by income while autonomous expenditures determine economic growth. In this issue, Nikiforos, Santetti, and von Arnim (2022) argue that the supermultiplier model cannot generate business cycles compatible with empirical observation. This paper shows that this conclusion is a consequence of the misspecification of the variable chosen to represent the investment share, which includes business and residential investment. As separating those expenditures is a central point in the supermultiplier theory, we estimate a VAR model for the US (1967–2020) using the data on business investment share instead. This procedure re-establishes an important feature of the supermultiplier theory, the mechanism of capital stock adjustment. The empirical results point to the business investment share generally lagging behind the cycle. Finally, we make some remarks on how to discuss the business cycle from the supermultiplier perspective. We argue that for the supermultiplier, the business cycle depends less on the mechanism of capital stock adjustment than on the behavior of the autonomous components of demand and changes in the multiplier components. As political, social, and institutional factors influence the latter two, each business cycle has its own narrative.