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Flexible Prices and the Business Cycle

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  • FABRICE COLLARD
  • HARRIS DELLAS

Abstract

Business cycles models with flexible prices face two major empirical challenges. One regards observed output dynamics: the positive, short run, autocorrelation in GNP growth, and the hump‐shaped, trend‐reverting output response to transitory shocks (Cogley and Nason 1995). The other regards the alleged persistent decline in employment following a positive technology shock (Galí 1999). No determinate model with flexible prices has so far been able to address all of the Cogley Nason–Galí challenges. We show that the standard RBC model can do so if it contains a signal extraction problem involving permanent and temporary supply shocks.

Suggested Citation

  • Fabrice Collard & Harris Dellas, 2012. "Flexible Prices and the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(1), pages 221-233, February.
    • Handle: RePEc:wly:jmoncb:v:44:y:2012:i:1:p:221-233
    DOI: 10.1111/j.1538-4616.2011.00474.x
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