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Indeterminacy, aggregate demand, and the real business cycle

  • Benhabib, Jess
  • Wen, Yi

We show that under indeterminacy aggregate demand shocks are able to explain not only aspects of actual °uctuations that standard RBC models predict fairly well, but also aspects of actual °uctuations that standard RBC models cannot explain, such as the hump-shaped, trend reverting impulse responses to transitory shocks found in US output (Cogley and Nason, AER, 1995); the large forecastable movements and comovements of output, consumption and hours (Rotemberg and Woodford, AER, 1996); and the fact that consumption appears to lead output and investment over the business cycle. Indeterminacy arises in our model due to capacity utilization and mild increasing returns to scale.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 51 (2004)
Issue (Month): 3 (April)
Pages: 503-530

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Handle: RePEc:eee:moneco:v:51:y:2004:i:3:p:503-530
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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