The great moderation and “falling off a cliff”: Neo-Kaldorian dynamics
Following the broad outlines of Kaldor's 1940 model, we develop a simple non-convex macroeconomic model of the Keynesian sort with two stable short-run equilibria. In reference to empirical data, it explains the phenomenon of falling off a (such as that perhaps seen during 2007-9) as a leap between equilibrium points, changing both expectations and behavior. Central to the origin of such jumps are endogenous declines in the demand/debt ratio that occur after persistent periods of high employment (cf. Minsky, 1982; Kalecki, 1933) which alter the short-run equilibria. Expectations adjustment allows short-run equilibration, based on a synthesis of the rational and adaptive theories of expectation determination. In addition, bringing in other macroeconomic analysis, the model suggests the likely need for exogenous shocks (pump-priming) engineered by policy-makers to allow recovery after a steep and sudden recession. The model also allows for milder business fluctuations. But underlying such fluctuations is an asymmetry which implies that it is easier to fall off a cliff than to climb back up afterward.