An endogenous mechanism of business cycles

This paper suggests that business cycles may be a manifestation of coupled real economy and stock market dynamics describes mechanism can generate economic fluctuations consistent with observed cycles. To this end, we seek to incorporate into the macroeconomic framework dynamic model based on opinion interactions (Gusev et al., 2015). We derive from microfoundations, provide its empirical verification, demonstrate it contains efficient as particular regime establish link through which models attached for study interaction. examine key effects, simple (Blanchard, 1981). The system generates nontrivial endogenous dynamics, exhibit deterministic stochastic features, producing quasiperiodic (business cycles). also inspect system’s behavior in phase space. coevolve dynamically along path governed by stochastically-forced dynamical two stable equilibria, one where expands other contracts, resulting identified coherence resonance phenomenon. Thus, incorporation framework, presented here, allows derivation realistic behaviors tractable setting.