Business-Cycle Macroeconomics in an Asset Pricing Financial Economy

The paper introduces a portfolio-based Keynesian endogenous business-cycle phase-switching macroeconomic model of risky investment where rational expectation occurs in the financial market with stocks, credits, and debt. There are stock market inefficiency and predictability. It predicts Okun’s Law, the Philips Curve, and the classics-monetarist-Keynesian Quantity Theory of Money. Whereas the classics and Keynesian differ on equilibrium versus disequilibrium, it justifies the monetarist-Keynesian difference by price rigidity. It tracks the U.S. financial and economic data during the 2008’s recession. Jump credit risks induce cyclical financial and macroeconomic fluctuations, and the equity-premium and risk-free rate puzzles. Market risk premium and credit risks show a significant impact of the financial sector on the real economy. To promote financial and economic growth, cutting interest rates is most effective at peak and trough. Curtailing credits at peak prolong growth. Enhancing credits and consumption growth stimulate GDP growth in a recession.