Market interaction

Abstract

The main idea of this chapter is that the interaction of the market for consumption goods and the market for investment goods may cause economic fluctuations. The observation of disproportionalities between different sectors of the economy defined as disequilibrium in the structure of production is very old in the business cycle literature, e.g. monetary and nonmonetary overinvestment theories or the acceleration principle. Overinvestment occurs if the equilibrium in the production structure between investment goods and consumption goods is disturbed. Due to the acceleration principle, an increase in demand on the market for consumption goods induces firms to demand new investment goods in order to be able to satisfy the increase in demand. The increase in the production of investment goods can be much larger than the initial increase in the demand for consumption goods since the value of the additional capital is usually larger than the value of the goods which are produced in one period. This is due to the fact that the machine can be used for several periods. One-sector models implementing the acceleration principle are the multiplier-accelerator models of Old-Keynesian theory, see chapter 4.3.1.