Overdeterminacy and Endogenous Cycles: T rygve H aavelmo's Business Cycle Model

The econometrician T rygve H aavelmo pursued a research programme in macroeconomic theory that was highly original for its time. We present his macro model for an economy with deregulated financial markets and a policy determined interest rate path. Disequilibria arise in the interface between asset markets and the real economy. A mismatch between the marginal return to capital and investors' required rate generates endogenous switching between recession and full employment regimes. Haavelmo regarded the ‘switching mechanism’ as a substitute for liquidity constraints, and together with his ideas of price dynamics, there is a clear K eynesian and W icksellian influence on his macroeconomic theorizing.