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Understanding Non-Inflationary Demand Driven Business Cycles

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  • Franck Portier

    (Toulouse School of Economics)

  • Paul Beaudry

    (University of British Columbia)

Abstract

During the last thirty years, US business cycles have been characterized by coun- tercyclical technology shocks and very low inflation variability. While the first fact runs counter to an RBC view of fluctuation and calls for demand shocks as a source of fluctuations, the second fact is difficult to reconcile with a New Keynesian model in which demand shocks are accommodated. In this paper we show that non-inflationary demand driven business cycles can be easily explained if one moves away from the rep- resentative agent framework on which the New Keynesian model and the RBC model are based. We show how changes in demand induced by changes in perceptions about the future can cause business cycle type fluctuations when agents are not perfectly mobile across sectors. As we use an extremely simple framework, we discuss the gener- ality of the results and develop a modified New Keynesian model with non inflationary demand driven fluctuations. We also document the relevance of our main assumptions regarding labor market segmentation and incomplete insurance using PSID data over the period 1968-2007.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 434.

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Date of creation: 2013
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Handle: RePEc:red:sed013:434

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  1. Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, 2009. "Investment Shocks and Business Cycles," NBER Working Papers 15570, National Bureau of Economic Research, Inc.
  2. Craig Burnside & Martin Eichenbaum & Jonas Fisher, 2003. "Fiscal Shocks and Their Consequences," NBER Working Papers 9772, National Bureau of Economic Research, Inc.
  3. Zheng Liu & Daniel F. Waggoner & Tao Zha, 2010. "Sources of Macroeconomic Fluctuations: A Regime-switching DSGE Approach," Emory Economics 1002, Department of Economics, Emory University (Atlanta).
  4. Stefano Eusepi & Bruce Preston, 2009. "Labor supply heterogeneity and macroeconomic comovement," Staff Reports 399, Federal Reserve Bank of New York.
  5. Cochrane, John H., 1991. "A critique of the application of unit root tests," Journal of Economic Dynamics and Control, Elsevier, vol. 15(2), pages 275-284, April.
  6. Susan Dynarski & Jonathan Gruber, 1997. "Can Families Smooth Variable Earnings?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 229-303.
  7. Beaudry, Paul & Collard, Fabrice & Portier, Franck, 2011. "Gold rush fever in business cycles," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 84-97, March.
  8. Beaudry, Paul & Portier, Franck, 2001. "An Exploration into Pigou's Theory of Cycles," CEPR Discussion Papers 2996, C.E.P.R. Discussion Papers.
  9. Den Haan, Wouter J. & Kaltenbrunner, Georg, 2009. "Anticipated growth and business cycles in matching models," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 309-327, April.
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Cited by:
  1. Robert B. Barsky & Susanto Basu & Keyoung Lee, 2014. "Whither News Shocks?," NBER Chapters, in: NBER Macroeconomics Annual 2014, Volume 29 National Bureau of Economic Research, Inc.

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