Empirical analysis of a debt-augmented Goodwin model for the United States

The Goodwin-Keen model was introduced to reflect the structural instability of debt-financed economies. The appeal of the model lies in its ability to reflect an economy that can either converge towards a Solow-like trajectory or towards a debt crisis. However, no empirical study has focused on the model up to now. Using u.s. data for non-financial firms over the period 1959-2019, this paper tests the empirical validity of an extended Goodwin-Keen model taking dividend payments into account. We propose an original two-step estimation procedure to simultaneously estimate parameters and quantify their uncertainty. We show that the model captures the historical cycles in the wage share and employment rate, while reflecting the trend growth in the debt-to-output ratio. This relatively good fit is achieved with sensible parameter estimates but a large uncertainty, indicating notably that the model fails to fully capture the debt dynamics. Finally, we show that, according to the estimated model projections, the probability of occurrence of a corporate debt crisis in the next century is less than 1%. Although the Goodwin-Keen model is too simplistic to reflect financial instability as a whole, our results show that it could be a useful framework for the development of larger macroeconomic models.