Abstract
Where do economic cycles come from? This paper contemplates an utmost minimalistic model and an underlying theory that rest on two assumptions that let them emerge endogenously: (1) the presence of interest-bearing debt, and (2) a degree of downward nominal wage rigidity. Despite its parsimony, the model generates well-behaved, self-evolving limit cycles and replicates six essential empirical facts: (1) booms are long, while recessions short-lived; (2) leverage is procyclical; (3) firm profit and wage shares are countercyclical and procyclical, respectively; (4) Phillips curves are downward-sloping and convex, and Okun’s law is replicated; (5) default cascades arise at the turning points to recessions; (6) lending spreads are countercyclical. One can refer to the model as being of a dynamic stochastic general disequilibrium (DSGD) kind.
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