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General Equilibrium and Business Cycles

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  • Fischer Black
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    Abstract

    The general equilibrium models in this paper, with complete markets, can give the major features of business cycles. The models include real investment, but information is costless and is available to everyone at the same time. Fluctuations in the match between resources and wants across many sectors create major fluctuations in output and unemployment, because moving resources from one sector to another is costly. Fluctuations in the demand for the services of durable goods causes much larger fluctuations in the output of durables, and causes unemployment that takes the form of temporary layoffs. Since specialized factors cooperate in producing goods and services, it makes sense to lay people off in groups rather than lowering wages and waiting for them to quit. Similarly, a vacancy is created when a specialized factor is missing from such a group. Technology comes with varying levels of risk and expected return associated with the degree of specialization. More specialization means more severe fluctuations and a higher average level of unemployment, along with a higher average level of output and growth. Monetary policy, interest rates, and fiscal policy have no special roles to play in the model.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0950.

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    Date of creation: Aug 1982
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    Publication status: published as Black, Fischer. "General Equilibrium and Business Cycles," Business Cyclesand Equilibrium, October 1987. Basil Blackwell.
    Handle: RePEc:nbr:nberwo:0950

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    1. Leamer, Edward E, 1983. "Let's Take the Con Out of Econometrics," American Economic Review, American Economic Association, vol. 73(1), pages 31-43, March.
    2. Feiger, George, 1976. "What Is Speculation?," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 677-87, November.
    3. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
    4. Robert G. King & Charles I. Plosser, 1982. "The Behavior of Money, Credit, and Prices in a Real Business Cycle," NBER Working Papers 0853, National Bureau of Economic Research, Inc.
    5. Finn Kydland & Edward C. Prescott, 1980. "A Competitive Theory of Fluctuations and the Feasibility and Desirability of Stabilization Policy," NBER Chapters, in: Rational Expectations and Economic Policy, pages 169-198 National Bureau of Economic Research, Inc.
    6. Pollak, Robert A, 1978. "Endogenous Tastes in Demand and Welfare Analysis," American Economic Review, American Economic Association, vol. 68(2), pages 374-79, May.
    7. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
    8. Dale W. Jorgenson, 1972. "Investment Behavior and the Production Function," Bell Journal of Economics, The RAND Corporation, vol. 3(1), pages 220-251, Spring.
    9. Lucas, Robert E., 1977. "Understanding business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 7-29, January.
    10. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, vol. 7(2), pages 188-209, February.
    11. Burdett, Kenneth & Mortensen, Dale T, 1980. "Search, Layoffs, and Labor Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 652-72, August.
    12. Stigler, George J & Becker, Gary S, 1977. "De Gustibus Non Est Disputandum," American Economic Review, American Economic Association, vol. 67(2), pages 76-90, March.
    13. Robert J. Barro & Robert G. King, 1982. "Time-Separable Preference and Intertemporal-Substitution Models of Business Cycles," NBER Working Papers 0888, National Bureau of Economic Research, Inc.
    14. Fama, Eugene F, 1970. "Multiperiod Consumption-Investment Decisions," American Economic Review, American Economic Association, vol. 60(1), pages 163-74, March.
    15. King, Robert G & Plosser, Charles I, 1984. "Money, Credit, and Prices in a Real Business Cycle," American Economic Review, American Economic Association, vol. 74(3), pages 363-80, June.
    16. 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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    Cited by:
    1. Joseph G. Altonji & John C. Ham, 1986. "Variation in Employment Growth in Canada: The Role of External, National, Regional and Industrial Factors," NBER Working Papers 1816, National Bureau of Economic Research, Inc.
    2. Doshchyn, Artur & Giommetti, Nicola, 2013. "Learning, Expectations, and Endogenous Business Cycles," MPRA Paper 49617, University Library of Munich, Germany.
    3. D'Agostino, Antonello & Serafini, Roberta & Ward, Melanie, 2006. "Sectoral explanations of employment in Europe: the role of services," Research Technical Papers 8/RT/06, Central Bank of Ireland.
    4. Liu, De-Chih, 2013. "The evolution of excess job reallocation in the U.S," Journal of Macroeconomics, Elsevier, vol. 36(C), pages 188-206.
    5. Bennett T. McCallum, 1988. "Real Business Cycle Models," NBER Working Papers 2480, National Bureau of Economic Research, Inc.
    6. Albu, Lucian-Liviu, 2006. "Non-linear models: applications in economics," MPRA Paper 3100, University Library of Munich, Germany.

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