29,582 research outputs found

    Granger causality and equilibrium business cycle theory

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    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

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    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

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    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

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

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    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.

    An analytical approach to buffer-stock saving

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    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

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    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

    Input and output inventory dynamics

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    This paper develops an analytically tractable general-equilibrium model of inventory dynamics based on a precautionary stockout-avoidance motive. The model’s predictions are broadly consistent with the U.S. business cycle and key features of inventory behavior. It is also shown that technological improvement of inventory management can increase, rather than decrease, the volatility of aggregate output. Key to this seemingly counterintuitive result is that a stockout-avoidance motive leads to a procyclical shadow value of inventories, which acts as an automatic stabilizer that discourages sales in booms and encourages demand in recessions, thereby reducing the variability of GDP.>Inventories ; Business cycles

    The seasonal cycle and the business cycle

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    Business cycles

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

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    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

    Liquidity demand and welfare in a heterogeneous-agent economy

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    This paper provides an analytically tractable general-equilibrium model of money demand with micro-foundations. The model is based on the incomplete-market model of Bewley (1980) where money serves as a store of value and provides liquidity to smooth consumption. The model is applied to study the effects of monetary policies. It is shown that heterogeneous liquidity demand can lead to sluggish movements in aggregate prices and positive responses from aggregate output to transitory money injections. However, permanent money growth can be extremely costly: With log utility function and an endogenously determined distribution of money balances that matches the household data, agents are willing to reduce consumption by 8% (or more) to avoid 10% annual inflation. The large welfare cost of inflation arises because inflation destroys the liquidity value and the buffer-stock function of money, thus raising the volatility of consumption for low-income households. The astonishingly large welfare cost of moderate inflation provides a justification for adopting a low inflation target by central banks and offers an explanation for the empirical relationship between inflation and social unrest in developing countries.Liquidity (Economics)
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