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Co-movement, Capital and Contracts: 'Normal' Cycles Through Creative Destruction

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Author Info

  • Francois, P.
  • Lloyd-Ellis, H.

    (Tilburg University, Center for Economic Research)

Abstract

We develop a unified theory of endogenous business cycles in which expansions are neoclassical growth periods driven by productivity improvements and capital accumulation, while downturns are the result of Keynesian contractions in aggregate demand below potential output. Recessions allow skilled labor to be reallocated to growth promoting activities which fuel subsequent expansions. However, rigidities in production and contractual limitations, inherent to the process of creative destruction, leave capital severely underutilized. A key feature of our equilibrium is the endogenous emergence of long term supply contracts between capitalist owners and producers.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2003-62.

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Date of creation: 2003
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Handle: RePEc:dgr:kubcen:200362

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Web page: http://center.uvt.nl

Related research

Keywords: Long-term contracting; investment irreversibility; putty-clay technology; asset- specificity; Endogenous cycles and growth;

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References

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  1. Comin, D., 2002. "R&D? A Small Contribution to Productivity Growth," Working Papers 02-01, C.V. Starr Center for Applied Economics, New York University.
  2. Julia K. Thomas, 2002. "Is lumpy investment relevant for the business cycle?," Staff Report 302, Federal Reserve Bank of Minneapolis.
  3. Kevin A. Hassett & R. Glenn Hubbard, 1998. "Tax Policy and Investment," NBER Working Papers 5683, National Bureau of Economic Research, Inc.
  4. Bils, Mark & Cho, Jang-Ok, 1994. "Cyclical factor utilization," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 319-354, April.
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  6. repec:fth:simfra:95-08 is not listed on IDEAS
  7. Mark Doms & Timothy Dunne, 1994. "Capital Adjustment Patterns in Manufacturing Plants," Working Papers 94-11, Center for Economic Studies, U.S. Census Bureau.
  8. Susanto Basu & John Fernald, 2001. "Why Is Productivity Procyclical? Why Do We Care?," NBER Chapters, in: New Developments in Productivity Analysis, pages 225-302 National Bureau of Economic Research, Inc.
  9. Francois, P. & Roberts, J., 2001. "Contracting Productivity Growth," Discussion Paper 2001-35, Tilburg University, Center for Economic Research.
  10. Dahl, Christian M. & Gonzalez-Rivera, Gloria, 2003. "Testing for neglected nonlinearity in regression models based on the theory of random fields," Journal of Econometrics, Elsevier, vol. 114(1), pages 141-164, May.
  11. Michele Boldrin & Lawrence J. Christiano & Jonas D.M. Fisher, 1999. "Habit persistence, asset returns and the business cycles," Working Paper Series WP-99-14, Federal Reserve Bank of Chicago.
  12. Martimort, David & Verdier, Thierry, 2000. " The Internal Organization of the Firm, Transaction Costs, and Macroeconomic Growth," Journal of Economic Growth, Springer, vol. 5(4), pages 315-40, December.
  13. David Andolfatto & Glenn M. MacDonald, 1998. "Technology Diffusion and Aggregate Dynamics," Cahiers de recherche CREFE / CREFE Working Papers 58, CREFE, Université du Québec à Montréal.
  14. Arturo Estrella & Frederic S. Mishkin, 1996. "The yield curve as a predictor of U.S. recessions," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 2(Jun).
  15. Scott Freeman & Dong-Pyo Hong & Dan Peled, 1999. "Endogenous Cycles and Growth with Indivisible Technological Developments," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 402-432, April.
  16. Patrick Francois & Huw Lloyd-Ellis, 2003. "Animal Spirits Through Creative Destruction," American Economic Review, American Economic Association, vol. 93(3), pages 530-550, June.
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Cited by:
  1. Owen Irvine & Scott Schuh, 2007. "The roles of comovement and inventory investment in the reduction of output volatility," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  2. F. Owen Irvine & Scott Schuh, 2005. "The roles of comovement and inventory investment in the reduction of output volatility," Working Papers 05-9, Federal Reserve Bank of Boston.

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