Investments as Business Cycle Trigger - Testing Hicks-Model hypotheses with Demand and Interest Rate Changes: Evidence from Two Behavioral Experiments

Abstract

The central Hicks hypotheses were tested using a behavioral science and the model with capacity effects and price changes. In a further step, the model was expanded to include interest-dependent investments. The Hicks hypotheses were confirmed. Demand created demand via induced investment, which led to an upward process, and the mere decline in demand growth already initiated a downward process. Errors by the central bank in controlling interest rates triggered economic fluctuations. Governments and central banks should be careful if they want to stimulate the economy through increased demand and low interest rates. The risk of overstimulation is great.