The Keynesian Micro-Foundations of the Business Cycle: Some Implications of Globalization

Abstract

In this chapter, we develop a microeconomic model of short-term output growth based upon interacting, heterogeneous individual agents operating under uncertainty according to Keynesian principles. Agents are heterogeneous and follow simple non-rational rules of behaviour which take into account each other’s behaviour. The model is deliberately parsimonious, and the agents do not exhibit learning behaviour. It is not necessary to invoke any form of exogenous shock in the model, and the cycle is purely endogenous, essentially arising from the existence of heterogeneous agents operating under uncertainty.