A Contribution to the Theory of Business Cycles
An economy consisting of identical perfectly competitive firms with real liquidity costs and a one-period production lag has a locally unstable stationary equilibrium with complex eigenvalues for a wide range of parameters. Monetary policy aimed at stabilizing real balances can support nonstationary equilibrium paths that converge to a limit cycle, which has Keynesian features. The first welfare theorem does not hold because the price level appears in the production function through liquidity costs, so that production has a positive externality. Copyright 1992, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Volume (Year): 107 (1992)
Issue (Month): 3 (August)
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