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Animal spirits, technology shocks and the business cycle

  • Weder, Mark

In this paper a two-sector growth model allowing indeterminacy to occur at relatively mild degrees of increasing returns is developed. It is shown that these economies of scale need only be present in one sector of the economy (investment). This feature of the model, therefore, builds on evidence that was recently reported by Basu and Fernald (1996). The model is also able to solve some puzzles of business cycle research which standard Real Business Cycle models have not been able to. The introduction of animal spirits generates a low negative contemporaneous correlation of hours and productivity as well as a procyclical investment share. The model can account for the observed variability of hours worked.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 24 (2000)
Issue (Month): 2 (February)
Pages: 273-295

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Handle: RePEc:eee:dyncon:v:24:y:2000:i:2:p:273-295
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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  1. Burda, Michael C., 1985. "New evidence on real wage-employment correlations from U.S. manufacturing data," Economics Letters, Elsevier, vol. 18(2-3), pages 283-285.
  2. Uhlig, H.F.H.V.S., 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper 1995-97, Tilburg University, Center for Economic Research.
  3. Benhabib, Jess & Farmer, Roger E.A., 1991. "Indeterminacy and Increasing Returns," Working Papers 91-59, C.V. Starr Center for Applied Economics, New York University.
  4. Jordi GalĂ­, 1993. "Monopolistic competition, business cycles and the composition of aggregate demand," Economics Working Papers 45, Department of Economics and Business, Universitat Pompeu Fabra.
  5. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Current Real-Business-Cycle Theories and Aggregate Labor-Market Fluctuations," American Economic Review, American Economic Association, vol. 82(3), pages 430-50, June.
  6. Jordi Gali, 1995. "Non-Walrasian Unemployment Fluctuations," NBER Working Papers 5337, National Bureau of Economic Research, Inc.
  7. Benhabib, Jess & Farmer, Roger E.A., 1995. "Indeterminacy and Sector-Specific Externalities," Working Papers 95-02, C.V. Starr Center for Applied Economics, New York University.
  8. Julio J. Rotemberg & Michael Woodford, 1991. "Markups and the Business Cycle," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 63-140 National Bureau of Economic Research, Inc.
  9. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  10. repec:dgr:kubcen:199597 is not listed on IDEAS
  11. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  12. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  13. Harald Uhlig, 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper / Institute for Empirical Macroeconomics 101, Federal Reserve Bank of Minneapolis.
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