Business Cycle during Structural Change: Arthur Lewis' Theory from a Neoclassical Perspective
72 Pages Posted: 5 Sep 2019
Date Written: August 9, 2019
We document that the nature of business cycles evolves over the process of development and structural change. In countries with large declining agricultural sectors, aggregate employment is uncorrelated with GDP.
During booms, employment in agriculture declines while labor productivity increases in agriculture more than in other sectors. We construct a uniﬁed theory of business cycles and structural change consistent with the stylized facts. The focal point of the theory is the simultaneous decline and modernization of agriculture. As capital accumulates, agriculture becomes increasingly capital intensive as modern agriculture crowds out traditional agriculture. Structural change accelerates in booms and slows down in recessions. We estimate the model and show that it accounts well for both the structural transformation and the business cycle fluctuations of China.
Keywords: Agriculture, Business Cycle, Capital Accumulation, China, Employment, Lewis, Modernization, Structural Change
JEL Classification: E32, O11, O13, O14, O41, O47, O53
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