Relative-Preference Shifts and the Business Cycle

22 Pages Posted: 26 Nov 2009

See all articles by William Addessi

William Addessi

University of Rome

Francesco Busato

Aarhus University - School of Business and Social Sciences

Date Written: November 25, 2009

Abstract

This paper develops a two-sector dynamic general equilibrium model in which intermporal fluctuations (and sectoral comovement) are driven by idiosyncratic shocks to relative preferences between consumption goods. This class of shocks may be interpreted as shifts in consumer tastes. When shifts in preferences occur, consumers associate a new and different level of satisfaction to the same basket of consumption goods according to the modified preferences. The paper shows that, if the initial composition of the consumption basket is sufficiently asymmetric, a shift in relative preferences produces a so strong "perception effect" capable of inducing inter and intra sectoral positive comovement of the main macroeconomic variables (i.e., output, consumption, investment, and employment). It is a welcome result that these findings are reached without introducing either aggregate technology shocks, or input-output linkages or shocks perturbing the relative preference between aggregate consumption and leisure.

Keywords: Demand Shocks, Two-sector Dynamic General Equilibrium Models

JEL Classification: F11, E32

Suggested Citation

Addessi, William and Busato, Francesco, Relative-Preference Shifts and the Business Cycle (November 25, 2009). Available at SSRN: https://ssrn.com/abstract=1513457 or http://dx.doi.org/10.2139/ssrn.1513457

William Addessi (Contact Author)

University of Rome ( email )

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HOME PAGE: http://sites.google.com/site/waddessi

Francesco Busato

Aarhus University - School of Business and Social Sciences ( email )

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DK-8000 Aarhus C
Denmark
+45 8942 1133 (Phone)
+45 8613 6334 (Fax)

HOME PAGE: http://www.econ.au.dk/afn

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