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Lost in Translation: Unified Consumption Theory, Dynamic AS-AD, and Business Cycles

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  • Max Gillman

    ()
    (Cardiff Business School and Institute of Economics-Research Centre for Economic and Regional Studies Hungarian Academy of Sciences)

Abstract

The paper shows how aggregate AS-AD can be derived within the standard neoclassical dynamic setting known as the Ramsey-Cass- Koopmans (RCK) model. AS-AD is the stationary equilibrium of the deterministic dynamic general equilibrium framework. The derivation builds a permanent income type consumption demand that corresponds to a consumption theory that depends on current income, illustrating analytically how to unify the alternative theories within RCK. With permanent income de.ned by the flow on time and goods endowments, the logic of changing both endowments simultaneously coincides with changing the external labor margin along with goods sector productivity in order to explain business cycles. This gives rise to a stylistic AS-AD explanation of the business cycle that is consistent with the primary features of the RBC literature and consumption theory.

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Bibliographic Info

Paper provided by Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 1305.

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Length: 23 pages
Date of creation: Jan 2013
Date of revision:
Handle: RePEc:has:discpr:1305

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Related research

Keywords: Ramsey-Cass-Koopmans; supply; demand; state variable; external labor margin;

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References

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  1. Wouter J. den Haan, 2002. "The Comovement between Real Activity and Prices in the G7," Tinbergen Institute Discussion Papers 02-092/2, Tinbergen Institute.
  2. John Y. Campbell & N. Gregory Mankiw, 1991. "Permanent Income, Current Income, and Consumption," NBER Working Papers 2436, National Bureau of Economic Research, Inc.
  3. N. Gregory Mankiw & David Romer & David N. Weil, 1992. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc.
  4. 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.
  5. Comin, D. & Gertler, M., 2003. "Medium Term Business Cycles," Working Papers 03-05, C.V. Starr Center for Applied Economics, New York University.
  6. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  7. Benhabib, Jess & Rogerson, Richard & Wright, Randall, 1991. "Homework in Macroeconomics: Household Production and Aggregate Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1166-87, December.
  8. Ben S. Bernanke & Refet S. G├╝rkaynak, 2002. "Is Growth Exogenous? Taking Mankiw, Romer, and Weil Seriously," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 11-72 National Bureau of Economic Research, Inc.
  9. Campbell, John Y. & Mankiw, N. Gregory, 1991. "The response of consumption to income : A cross-country investigation," European Economic Review, Elsevier, vol. 35(4), pages 723-756, May.
  10. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  11. 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.
  12. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  13. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, October.
  14. Paul Gomme & Peter Rupert, 2005. "Theory, measurement, and calibration of macroeconomic models," Working Paper 0505, Federal Reserve Bank of Cleveland.
  15. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
  16. Harberger, Arnold C, 1998. "A Vision of the Growth Process," American Economic Review, American Economic Association, vol. 88(1), pages 1-32, March.
  17. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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