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Granger causality and equilibrium business cycle theory

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  • Yi Wen
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Abstract

Postwar U.S. data show that consumption growth "Granger-causes" output and investment growth, which is puzzling if technology is the driving force of the business cycle. The author asks whether general equilibrium models with information frictions and non-technology shocks can rationalize the observed causal relationships. His conclusion is they cannot.

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Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2007)
Issue (Month): May ()
Pages: 195-206

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Handle: RePEc:fip:fedlrv:y:2007:i:may:p:195-206:n:v.89no.3

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Keywords: Business cycles;

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References

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  1. Timothy Cogley & James M. Nason, 1993. "Output dynamics in real business cycle models," Working Papers in Applied Economic Theory, Federal Reserve Bank of San Francisco 93-10, Federal Reserve Bank of San Francisco.
  2. Craig Burnside & Martin Eichenbaum, 1994. "Factor Hoarding and the Propagation of Business Cycles Shocks," NBER Working Papers 4675, National Bureau of Economic Research, Inc.
  3. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  4. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(6), pages 971-87, December.
  5. Stephanie Schmitt-Grohe, 1999. "Endogenous business cycles and the dynamics of output, hours, and consumption," Departmental Working Papers, Rutgers University, Department of Economics 199915, Rutgers University, Department of Economics.
  6. Benhabib, Jess & Farmer, Roger E.A., 1991. "Indeterminacy and Increasing Returns," Working Papers, C.V. Starr Center for Applied Economics, New York University 91-59, C.V. Starr Center for Applied Economics, New York University.
  7. Aubhik Khan & Julia K. Thomas, 2004. "Modeling inventories over the business cycle," Working Papers 04-13, Federal Reserve Bank of Philadelphia.
  8. Wen, Yi, 1998. "Capacity Utilization under Increasing Returns to Scale," Journal of Economic Theory, Elsevier, Elsevier, vol. 81(1), pages 7-36, July.
  9. Wen, Yi, 2005. "Understanding the inventory cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(8), pages 1533-1555, November.
  10. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, Elsevier, vol. 63(1), pages 42-72, June.
  11. King, R.G. & Baxter, M., 1990. "Productive Externalities And Cyclical Volatility," RCER Working Papers 245, University of Rochester - Center for Economic Research (RCER).
  12. Benhabib, Jess & Wen, Yi, 2001. "Indeterminacy, Aggregate Demand, and the Real Business Cycle," Working Papers, Cornell University, Center for Analytic Economics 01-09r, Cornell University, Center for Analytic Economics.
  13. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 24, Federal Reserve Bank of Minneapolis.
  14. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, Econometric Society, vol. 37(3), pages 424-38, July.
  15. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 78(3), pages 402-17, June.
  16. L. Wade, 1988. "Review," Public Choice, Springer, Springer, vol. 58(1), pages 99-100, July.
  17. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 21(2-3), pages 195-232.
  18. Rotemberg, Julio J & Woodford, Michael, 1996. "Real-Business-Cycle Models and the Forecastable Movements in Output, Hours, and Consumption," American Economic Review, American Economic Association, American Economic Association, vol. 86(1), pages 71-89, March.
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Cited by:
  1. Dressler, Scott J. & Li, Victor E., 2009. "Inside money, credit, and investment," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 33(4), pages 970-984, April.

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