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AS-AD in the Standard Dynamic Neoclassical Model: Business Cycles and Growth Trends

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  • Gillman, Max

    ()
    (Cardiff Business School)

Abstract

The paper shows how a dynamic neoclassical AS-AD can be derived and used to describe business cycles and growth trends to undergraduates. Derived within the Ramsey-Cass-Koopmans (RCK) model, the AS-AD is the stationary equilibrium of the deterministic dynamic general equilibrium framework. Allowing Solow exogenous growth, the AS-AD is derived along the balanced growth path equilibrium. The derivation first builds consumption demand, aggregate demand, and then aggregate supply through the equilibrium conditions and a closed form solution for the capital stock. Through a comparative static change in goods sector productivity, the paper shows the basic failing of the standard RBC model. Allowing a second comparative static change in the consumer's time endowment, this captures a change in the "external margin" of labor supply. These comparative statics enable explanation of the business cycle, and "Solow-plus" growth trends including education time and working time. In extension of RCK, the paper shows beyond the undergraduate level, how to derive AS-AD when including human capital and endogenous growth. This allows an endogenous change in the time endowment for work and leisure through a change in human capital productivity, with a similar but more fundamental AS-AD story of business cycles and growth trends.

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Bibliographic Info

Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2012/12.

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Length: 41 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:cdf:wpaper:2012/12

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Keywords: Ramsey-Cass-Koopmans; supply; demand; state variable;

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  1. David Colander, 1995. "The Stories We Tell: A Reconsideration of AS/AD Analysis," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 9(3), pages 169-188, Summer.
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  3. Diego Comin & Mark Gertler, 2003. "Medium Term Business Cycles," NBER Working Papers 10003, National Bureau of Economic Research, Inc.
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  12. Benhabib, Jess & Rogerson, Richard & Wright, Randall, 1991. "Homework in Macroeconomics: Household Production and Aggregate Fluctuations," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(6), pages 1166-87, December.
  13. Dang, Jing & Gillman, Max & Kejak, Michal, 2011. "Real Business Cycles with a Human Capital Investment Sector and Endogenous Growth: Persistence, Volatility and Labor Puzzles," Cardiff Economics Working Papers E2011/8, Cardiff University, Cardiff Business School, Economics Section.
  14. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number frie57-1.
  15. Judit Karsai, 2012. "Development of the Hungarian Venture Capital and Private Equity Industry over the Past Two Decades," IEHAS Discussion Papers, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences 1201, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  16. Max Gillman, 2002. "Keynes's Treatise : aggregate price theory for modern analysis?," The European Journal of the History of Economic Thought, Taylor & Francis Journals, Taylor & Francis Journals, vol. 9(3), pages 430-451.
  17. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, Elsevier, vol. 21(1), pages 3-16, January.
  18. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, National Bureau of Economic Research, Inc, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
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