Can interaction contribute to the explanation of business cycles?

Purpose – Recent literature has been able to include into standard optimal growth models some hypotheses that allow for the generation of endogenous long-run fluctuations. This paper aims to contribute to this endogenous business cycles literature by considering social interactions. Design/methodology/approach – The paper is essentially theoretical and it develops a growth/cycles model, in which social interactions play a relevant role. In the proposed model, individuals can choose, under a discrete choice rule, to which social group they prefer to belong. This selection process is constrained essentially by the dimension of the group, which is the main determinant regarding the utility individuals withdraw from social interaction. The proposed set-up implies the presence of cycles and chaotic motion describing the evolution of group dimension over time. Findings – Because being a member of a group involves costs to households, the inclusion of these costs in a standard Ramsey growth model will imply that endogenous cycles might arise in the time trajectory of the growth rate of output. Research limitations/implications – The model treats the possible effect of interaction among agents in a social context as a source of fluctuations. Obviously, it is not claimed that this is the only or the single most relevant cause for cycles. Thus, it should be used in future work as an additional factor to take into account in more comprehensive growth analyses. Practical implications – If the utility withdrawn from belonging to different social groups is a relevant source of macroeconomic instability, relevant policy guidelines could emerge from the understanding of such a causality link. Originality/value – The paper goes beyond the traditional approach to cycles as triggered by monetary or fiscal policy, markets inefficiency, price sluggishness or some sort of real disturbances.