Co-Movement, Capital and Contracts: 'Normal' Cycles Through Creative Destruction

CentER Discussion Paper No. 2003-62

54 Pages Posted: 14 Jun 2004

See all articles by Patrick Francois

Patrick Francois

University of British Columbia (UBC) - Department of Economics

Huw Lloyd-Ellis

Queen's University - Department of Economics

Date Written: 2003

Abstract

We develop a unified theory of endogenous business cycles in which expansions are neoclassical growth periods driven by productivity improvements and capital accumulation, while downturns are the result of Keynesian contractions in aggregate demand below potential output. Recessions allow skilled labor to be reallocated to growth promoting activities which fuel subsequent expansions. However, rigidities in production and contractual limitations, inherent to the process of creative destruction, leave capital severely underutilized. A key feature of our equilibrium is the endogenous emergence of long term supply contracts between capitalist owners and producers.

Keywords: Contracts, investment, assets, technology, growth, business cycles, productivity, capital accumulation

JEL Classification: E0, E3, O3, O4

Suggested Citation

Francois, Patrick and Lloyd-Ellis, Huw, Co-Movement, Capital and Contracts: 'Normal' Cycles Through Creative Destruction (2003). CentER Discussion Paper No. 2003-62, Available at SSRN: https://ssrn.com/abstract=556092 or http://dx.doi.org/10.2139/ssrn.556092

Patrick Francois (Contact Author)

University of British Columbia (UBC) - Department of Economics ( email )

997-1873 East Mall
Vancouver, BC V6T 1Z1
Canada

Huw Lloyd-Ellis

Queen's University - Department of Economics ( email )

99 University Avenue
Kingston K7L 3N6, Ontario
Canada K7L 3N6

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