The physics of business cycles and inflation

TL;DR

This paper models US business cycles and inflation using an extended predator-prey framework, capturing observed cycles driven by oil shocks and interest rate changes with analytical predictions of cycle characteristics.

Contribution

It introduces a novel extension of Lotka-Volterra equations incorporating anticipation, providing a new analytical approach to understanding economic cycle dynamics.

Findings

Successfully models four US business cycles with oil and interest shocks

Predicts cycle periods, phase shifts, and shock sensitivities accurately

Extends predator-prey models to economic phenomena with anticipation effects

Abstract

We analyse four consecutive cycles observed in the USA for employment and inflation. They are driven by three oil price shocks and an intended interest rate shock. Non-linear coupling between the rate equations for consumer products as prey and consumers as predators provides the required instability, but its natural damping is too high for spontaneous cycles. Extending the Lotka-Volterra equations with a small term for collective anticipation yields a second analytic solution without damping. It predicts the base period, phase shifts, and the sensitivity to shocks for all six cyclic variables correctly.