Overdeterminacy and endogenous cycles:Trygve Haavelmo’s business cycle model and its implications for monetary policy

André K. Anundsen, Tord S. H. Krogh, Ragnar Nymoen, Jon Vislie

Memo 03/2011

Memo (pdf)

This paper presents the business cycle model that Trygve Haavelmo developed as part of his research program in macroeconomic and monetary theory. Driven by a mismatch between the marginal return to capital and the rate of return required by capital owners, this model generates endogenous cycles. The theory leads to a distinct analysis of the scope and limitations of monetary policy. A main message of the model is that care should be taken when conducting 'autonomous' monetary policy and that special emphasis should be put on the soundness of nancial markets. Adopting a strict nominal anchor as the main objective of monetary policy might generate imbalances in the capital market.

Published June 16, 2014 10:29 AM - Last modified Jan. 24, 2019 11:43 AM