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

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  • Max Gillman

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 Department of Economics, Central European University in its series CEU Working Papers with number 2012_8.

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Date of creation: 15 May 2012
Date of revision: 15 May 2012
Handle: RePEc:ceu:econwp:2012_8

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  1. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
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  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. David Colander, 1995. "The Stories We Tell: A Reconsideration of AS/AD Analysis," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 169-188, Summer.
  15. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
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  17. Judit Markus & Anna Radvanyi & Miklos Pinter, 2012. "The Shapley Value for Airport and Irrigation Games," IEHAS Discussion Papers 1207, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  18. Judit Karsai, 2012. "Development of the Hungarian Venture Capital and Private Equity Industry over the Past Two Decades," IEHAS Discussion Papers 1201, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
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