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The Role of Agriculture in Aggregate Business Cycle Fluctuations

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  • Jose Maria Da Rocha
  • Diego Restuccia

Abstract

The agricultural sector has certain distinctive features over the business cycle: it is more volatile than and not positively correlated with the rest of the economy and its employment is counter-cyclical. Because of these features and even though the agricultural sector represents less than 2% of the U.S. economy, we show that agriculture plays an essential role in understanding aggregate business cycles. The inclusion of agriculture into standard business cycle analysis resolves the longstanding problems of the standard theory in matching the observed volatility of aggregate labor and the correlation of aggregate labor and productivity (the so called Dunlop-Tharshis observation). In addition, the role of agriculture in the economy can account for the substantial differences observed in business cycle patterns across countries. This novel implication of the model is consistent with the systematic relationship observed between business cycle patterns and the share of agriculture across countries. Our theory has two important implications. First, the model implies that as the size of the agricultural sector falls, business cycle properties across countries should converge. Second, the role of agriculture provides a simple, measurable, and contrastable explanation for the historical properties of aggregate business cycles documented by Backus and Kehoe (1992).

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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number diegor-02-04.

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Length: 37 pages
Date of creation: 11 Jul 2002
Date of revision:
Handle: RePEc:tor:tecipa:diegor-02-04

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Keywords: Business Cycles; Agriculture; Two-sector Model.;

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  1. Conesa, Juan Carlos & Diaz-Moreno, Carlos & Galdon-Sanchez, Jose Enrique, 2002. "Explaining cross-country differences in participation rates and aggregate fluctuations," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 26(2), pages 333-345, February.
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  7. Jose Maria Da Rocha & Diego Restuccia, 2002. "Aggregate Employment Fluctuations and Agricultural Share," Working Papers, University of Toronto, Department of Economics diegor-02-02, University of Toronto, Department of Economics.
  8. Galí, Jordi, 1996. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1499, C.E.P.R. Discussion Papers.
  9. Fiorito, Riccardo & Kollintzas, Tryphon, 1992. "Stylized Facts of Business Cycles in the G7 from a Real Business Cycles Perspective," CEPR Discussion Papers, C.E.P.R. Discussion Papers 681, C.E.P.R. Discussion Papers.
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  14. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
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  16. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 16(3), pages 309-327, November.
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Cited by:
  1. Jose Maria Da Rocha & Diego Restuccia, 2002. "Aggregate Employment Fluctuations and Agricultural Share," Working Papers, University of Toronto, Department of Economics diegor-02-02, University of Toronto, Department of Economics.

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