The Efficient Disequilibrium: A New Theory of the Business Cycle
Albert Pacelli
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Abstract
This study proposes a revolutionary theory of business cycles, arguing that they are not market failures but rather endogenous and essential for maximizing economic efficiency. To demonstrate our theory, we introduce the Augmented National Income Equilibrium Model Business Cycle, which comprises income, consumption, investment, the pure interest rate (R), and the potential return on investment (P RI). Through heuristic application of the model, we demonstrate how the dynamic interplay of these components generates business cycles that continuously clear without achieving traditional equilibrium. Our model shows that (i) the Central Growth Rate (CGR), which represents the long-term income growth trend, establishes the upper and lower bounds for the oscillatory relationship between changes consumption and investment when considered independently of the absolute income level, ensuring long-term stability within cyclical dynamics; (ii) R, which represents the time preference for consumption, closely tracks the CGR, mediating income allocation between consumption and investment; and (iii) continuous oscillation of the PRI-R Differential, which we define as (P RI-R), is the primary driver of the business cycle, dynamically guiding capital allocation decisions. Our study empirically confirms that oscillations in consumption and investment fully account for GDP cyclicality. While shocks and other destabilizing influences undoubtedly play a role when they occur, the Augmented NIE Model Business Cycle demonstrates that cyclical behavior emerges even in their absence. When we remove the influence of the absolute level of income on consumption This working paper represents the formal development of a theory that has informed my market analysis for nearly 40 years. The initial ideas were conceived around the time of my book, The Speculator's Edge, in 1989, during my career as a professional speculator. Comments and feedback are welcome at [email protected].
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