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Indeterminacy, aggregate demand, and the real business cycle

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  • Benhabib, Jess
  • Wen, Yi

Abstract

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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  • Benhabib, Jess & Wen, Yi, 2004. "Indeterminacy, aggregate demand, and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 503-530, April.
    • Handle: RePEc:eee:moneco:v:51:y:2004:i:3:p:503-530
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