Theory and Empirics of the Goodwin Model

ABSTRACT The Goodwin model, based on a system of two nonlinear differential equations, offers a parsimonious model of business cycle fluctuations in capitalist economies. In this paper, we offer two simple proofs that solution trajectories are closed orbits. We also conduct empirical analyses with annual data for 54 postwar business cycles across 15 OECD economies. We find that the qualitative predictions of the model about the direction of cycles is largely valid; we find the quantitative predictions of the model are very good for the employment rate but less so for the wage share.