The Taylor Rule and Speculative Bubbles in a Keynes-Minsky Model of Cyclical Fluctuations

Resumen

This paper aims to extend the model of cyclical fluctuations developed by Fazzari, Ferri, and Greenberg (2008) through the incorporation of a monetary policy rule (Taylor rule) and a Markov process for the dynamics of speculative bubbles in the value of consumers’ financial wealth. In this context, we show that introducing a Taylor rule in the framework developed by Fazzari, Ferri, and Greenberg (2008) has the effect of dampening the cyclical fluctuation of the macroeconomics series (growth, unemployment, investment. and debt level) and preventing the persistence of cyclical fluctuations, which would result from the interaction between the accelerator and multiplier effects. The persistent and irregular character of fluctuations on the output growth rate observed in actual economies can be generated by the introduction of a Markovian generation process of speculative bubbles in the value of financial wealth and its corresponding impact on consumption expenditures.