Business Cycles... without Productivity Shocks

Abstract:     
In contrast with well known theoretical and empirical results, this model shows that no externalities, no (even mild) increasing returns, no variable capacity utilization, no variable effort, no consumption habit formation are needed for demand shocks to explain the main aspects of actual fluctuations. In particular, it is showed that demand shocks are able to explain fairly well the main aspects of actual fluctuations for the US economy into a two-sector general equilibrium model aggregate. This model, moreover, is not subject to crowding out effect, which is a problem peculiar of a one-sector general equilibrium model with where fluctuations are demand driven. This analysis, thus, brings together real business cycle theory into closer conformity not only with the prediction of Keynesian theory, but also with actual data.

Number of Pages in PDF File: 25

Keywords: Demand-Driven Business Cycles, Demand Uncertainty, External and Internal Finance, Keynesian Model

JEL Classification: E32, E12, E13, D80, G32

working papers series