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2000): "Indeterminacy, Aggregate Demand and the Real Business Cycle

By Jess Benhabib and Yi Wen


We show that under indeterminacy aggregate demand shocks are able to explain not only aspects of actual fluctuations that standard RBC models predict fairly well, but also aspects of actual fluctuations that standard RBC models cannot explain, such as the hump-shaped, trend reverting impulse responses to transitory shocks found in US output, investment, and hours. Indeterminacy arises in our model due to capacity utilization andmildincreasingreturnstoscale. We wish to thank Jordi Gali, Stephanie Schmitt-Grohé, Karl Shell, and Martin Uribe fo

Year: 2011
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