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Endogenous Business Cycles with Consumption Externalities

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  • Zhi Li
  • Xiaopeng Yin,

Abstract

Empirical evidences tell us that in the recent years the expansion period is increased with reduction of the contraction period in the U.S. business cycles. Moreover, the business cycles in the United States also show the trend to be moderated with recent economic growth induced and supported by high technologies and their industries. We study endogenous business cycles by a modified synthesized endogenous business cycles model “in which expansions are neoclassical growth periods driven by productivity improvements and capital accumulation, while downturns are the results of Keynesian contractions in aggregate demand†(Francois and Lloyd-Ellis, 2002), with consumption externalities. By considering consumption externalities, the endogenized business cycles will be more likely to happen, the optimal consumption level will be higher, the technology growth rate will be bigger, the length of expansion will be longer and the length of contraction will be shorter. All of these results will lead to a faster and longer economic growth and smoother cycles. These theoretical results are significantly different from those in circumstances without the consumption externalities Francois and Lloyd-Ellis (2002) obtained, and are strongly supported by the data from the United States in the different periods.

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 402.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:402

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Keywords: Endogenous Business Cycle; Consumption Externality; Endogenous Growth;

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  8. Peter A. Diamond, 1973. "Consumption Externalities and Imperfect Corrective Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(2), pages 526-538, Autumn.
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