Financial fragility, effective demand and the business cycle

Abstract

A shifting equilibrium model of effective demand is constructed, in which the state of long run expectations is non‐constant, and is affected by the disappointment of short‐run expectations. It is shown that this model gives rise to cumulative expansions/contractions in nominal income. Changes in the financial fragility of households and firms in the course of these expansions/contractions are then allowed for, together with commercial bank reactions to changing financial fragility. It is shown that turning points in the expansions/contractions of nominal income can arise, resulting in a model of aggregate fluctuations in which the business cycle is aperiodic and of no fixed amplitude.

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