Dualism and Macroeconomic Volatility

This paper develops a simple macroeconomic model that shows that combin-ing capital market imperfections together with unequal access to investment opportunities across individuals can generate endogenous and permanent fluctua-tions in aggregate GDP, investment, and interest rates. Reducing inequality of access may be a necessary condition for macroeconomic stabilization. Moreover, countercyclical fiscal policies have a role to play: in our model savings are underutilized in slumps because of the limited debt capacity of potential investors. Therefore, the government should issue public debt during recessions in order to absorb those idle savings and finance investment subsidies or tax cuts for investors. The most important single fact about saving and investment activities is that in our industrial society they are generally done by different people and for different reasons. (...) For years there might tend to be too little investment, leading to deflation, losses, excess capacity and unemployment. For other years, there might tend to be too much investment, leading to periods of chronic inflation—unless prudent and proper public policies in the fiscal and monetary fields are followed Paul A. Samuelson, Economics 8th edition, 1970, pp. 196–198.