Granger causality and equilibrium business cycle theory

Post-war US data show that consumption growth "Granger causes" output and investment growth. This is puzzling if technology is the driving force of the business cycle. I ask whether general equilibrium models with information frictions and non-technology shocks can rationalize the observed causal relations. My conclusion is they cannot.Business cycles

Durable good inventories and the volatility of production: explaining the less volatile U.S. economy

This paper provides a simple dynamic optimization model of durable goods inventories. Closed-form solutions are derived in a general equilibrium environment with imperfect information and serially correlated shocks. The model is then applied to scrutinize some popular conjectures regarding the causes of the volatility reduction of GDP since 1984.Investments ; Production (Economic theory)

Money supply, credit expansion, and housing price inflation

Credit and M2 may be driven simultaneously as part of a broader financial intermediation process; a common underlying factor may be the interest rateMoney supply ; Credit ; Housing - Prices

Why do people dislike inflation?

Inflation is seldom caused by lump-sum transfers but is often caused by higher government spending programs.Inflation (Finance)

Economic growth and the global savings glut

Economic theory predicts that fast growth can lead to high saving rates if people lack financial institutions that allow them to borrow.Economic development ; International finance

Production and inventory behavior of capital

This paper provides a dynamic optimization model of durable good inventories to study the interactions between investment demand and production of capital goods. There are three major findings: First, capital suppliers' inventory behavior makes investment demand more volatile in equilibrium; Second, equilibrium price of capital is characterized by downward stickiness; Third, the responses of the capital market to interest rate and other environmental changes are asymmetric. All are the results of equilibrium interactions between demand and supply.Production (Economic theory) ; Business cycles ; Investments

Understanding Self-Fulfilling Rational Expectations Equilibria in Real Business Cycle Models

Necessary conditions for indeterminacy in standard RBC models have been extensively studied, but intuitive understanding of the economic mechanism that generates indeterminacy has yet to be fully explored. Following the permanent income theory, this paper provides an alternative framework for understanding and deriving the technical conditions of indeterminacy in RBC models. A virtue of this approach is that in deriving the conditions of indeterminacy, one can see clearly not only how indeterminacy arises but also how robust the indeterminacy is to structural perturbations in preferences, technologies, and market structures.

The multiplier: a general equilibrium analysis of multi-stage-fabrication economy with inventories

This paper provides a general equilibrium multi-stage production model to explain the co-existence and co-movement of output- and input-inventories. The model offers a neoclassical perspective on the propagation mechanism of demand uncertainty. It reveals that uncertainty in demand at downstream can be transmitted and amplified towards upstream by inventory investment at all stages of production via input-output linkages, leading to a chain-multiplier effect on aggregate output and employment. The model is capable of explaining several long-standing puzzles of the business cycle associated with inventories.Business cycles ; Production (Economic theory) ; Investments

An analytical approach to buffer-stock saving

The profession has been longing for closed-form solutions to consumption functions under uncertainty and borrowing constraints. This paper proposes an analytical approach to solving buffer-stock saving models with both idiosyncratic and aggregate uncertainties. It is shown analytically that an individual’s optimal consumption plan under uncertainty follows the rule of thumb: Consumption is proportional to a target wealth with the marginal propensity to consume depending on the state of the macroeconomy. The method is applied to addressing two long- standing puzzles: the "excess smoothness" and "excess sensitivity" of consumption with respect to income changes. Some of my findings sharply contradict the conventional wisdom.Saving and investment ; Income

By force of demand: explaining international comovements and the saving-investment correlation puzzle

This paper explores the possibility that economic fluctuations may be largely demand-driven. It is shown that the stylized open-economy business cycle regularities documented by Feldstein and Horioka (1980) and Backus, Kehoe and Kydland (1992) can be explained by demand shocks alone even in a standard general equilibrium model. Frictions such as market incompleteness, increasing returns to scale, and sticky prices do not appear to be the preconditions for resolving these long-standing puzzles.Business cycles ; Saving and investment