Title: Understanding business cycles in the perspectives of stabilizing and destabilizing mechanism
Authors: Gang Gong - Yunnan University of Finance and Economics (China) [presenting]
Abstract: The so-called stabilization mechanism is a type of economic activity embedded in the economy that can stabilize it when it deviates from equilibrium (or a steady-state). A typical example is price adjustment. While price adjustment can be seen as a stabilization mechanism, are there mechanisms that destabilize an economy? The aim is to demonstrate that investment adjustment is a destabilizing mechanism. Given the existence of a destabilization mechanism, economic fluctuations (or business cycles) can thus be understood as the interaction between these two mechanisms. We build a macro-dynamic model with investment and price as the core macroeconomic variables. The analysis shows that due to price stickiness, the price adjustment mechanism may not be enough to stabilize the economy. In this case, a government stabilization policy is necessary for further stabilization. We also provide an empirical analysis to test our theoretical results.