How interest rate influences a business cycle model

Abstract

We study the effect of interest rate on phenomenon of business cycle in a Kaldor-Kalecki model. From the information of the People's Bank of China and the Federal Reserve System, we know the interest rate is not a constant but with remarkable periodic volatility. Therefore, we consider periodically forced interest rate in the model and study its dynamics. It is found that, both limit cycle through Hopf bifurcation in unforced system and periodic solutions generated by period doubling bifurcation or resonance in periodically forced system, can lead to cyclical economic fluctuations. Our analysis reveals that the cyclical fluctuation of interest rate is one of a key formation mechanism of business cycle, which agrees well with the pure monetary theory on business cycle. Moreover, this fluctuation can cause chaos in a business cycle system.