Increasing Returns, Durables and Economic Fluctuations
Kevin M. Murphy
University of Chicago; National Bureau of Economic Research (NBER)
Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
Robert W. Vishny
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
NBER Working Paper No. w3014
We describe an economy where a durable good is produced with an increasing returns to scale technology. Equilibria in this economy take the form of business cycles in which consumption fluctuates too much and is too low on average. A 2-sector version of this economy with imperfect credit and immobile labor also exhibits aggregate business cycles, in which outputs and labor inputs in different sectors move together. The model is consistent with a broad range of evidence on economic fluctuations.
Number of Pages in PDF File: 44working papers series
Date posted: October 3, 2007
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