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Understanding Noninflationary Demand-Driven Business Cycles

In: NBER Macroeconomics Annual 2013, Volume 28

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  • Paul Beaudry
  • Franck Portier

Abstract

During the last thirty years, US business cycles have been characterized by coun- tercyclical technology shocks and very low inflation variability. While the first fact runs counter to an RBC view of fluctuation and calls for demand shocks as a source of fluctuations, the second fact is difficult to reconcile with a New Keynesian model in which demand shocks are accommodated. In this paper we show that non-inflationary demand driven business cycles can be easily explained if one moves away from the rep- resentative agent framework on which the New Keynesian model and the RBC model are based. We show how changes in demand induced by changes in perceptions about the future can cause business cycle type fluctuations when agents are not perfectly mobile across sectors. As we use an extremely simple framework, we discuss the gener- ality of the results and develop a modified New Keynesian model with non inflationary demand driven fluctuations. We also document the relevance of our main assumptions regarding labor market segmentation and incomplete insurance using PSID data over the period 1968-2007.
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Suggested Citation

  • Paul Beaudry & Franck Portier, 2013. "Understanding Noninflationary Demand-Driven Business Cycles," NBER Chapters,in: NBER Macroeconomics Annual 2013, Volume 28, pages 69-130 National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:12929
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    References listed on IDEAS

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    1. Justiniano, Alejandro & Primiceri, Giorgio E. & Tambalotti, Andrea, 2010. "Investment shocks and business cycles," Journal of Monetary Economics, Elsevier, pages 132-145.
    2. Burnside, Craig & Eichenbaum, Martin & Fisher, Jonas D. M., 2004. "Fiscal shocks and their consequences," Journal of Economic Theory, Elsevier, vol. 115(1), pages 89-117, March.
    3. Beaudry, Paul & Collard, Fabrice & Portier, Franck, 2011. "Gold rush fever in business cycles," Journal of Monetary Economics, Elsevier, pages 84-97.
    4. Stefano Eusepi & Bruce Preston, 2009. "Labor Supply Heterogeneity and Macroeconomic Co-movement," NBER Working Papers 15561, National Bureau of Economic Research, Inc.
    5. Zheng Liu & Daniel F. Waggoner & Tao Zha, 2011. "Sources of macroeconomic fluctuations: A regime‐switching DSGE approach," Quantitative Economics, Econometric Society, pages 251-301.
    6. Beaudry, Paul & Portier, Franck, 2004. "An exploration into Pigou's theory of cycles," Journal of Monetary Economics, Elsevier, pages 1183-1216.
    7. Den Haan, Wouter J. & Kaltenbrunner, Georg, 2009. "Anticipated growth and business cycles in matching models," Journal of Monetary Economics, Elsevier, pages 309-327.
    8. Cochrane, John H., 1991. "A critique of the application of unit root tests," Journal of Economic Dynamics and Control, Elsevier, vol. 15(2), pages 275-284, April.
    9. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1329-1368.
    10. Susan Dynarski & Jonathan Gruber, 1997. "Can Families Smooth Variable Earnings?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, pages 229-303.
    11. Beaudry, Paul & Portier, Franck, 2004. "An exploration into Pigou's theory of cycles," Journal of Monetary Economics, Elsevier, pages 1183-1216.
    12. John G. Fernald, 2015. "Productivity and Potential Output before, during, and after the Great Recession," NBER Macroeconomics Annual, University of Chicago Press, vol. 29(1), pages 1-51.
    13. Den Haan, Wouter J. & Kaltenbrunner, Georg, 2009. "Anticipated growth and business cycles in matching models," Journal of Monetary Economics, Elsevier, pages 309-327.
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    Cited by:

    1. Maarten Dossche & Vivien Lewis & Céline Poilly, 2016. "Employment, Hours and the Welfare Effects of Intra-Firm Bargaining," AMSE Working Papers 1632, Aix-Marseille School of Economics, Marseille, France.
    2. Francesco Furlanetto & Francesco Ravazzolo & Samad Sarferaz, 2014. "Identification of financial factors in economic fluctuations," Working Paper 2014/09, Norges Bank.
    3. Robert B. Barsky & Susanto Basu & Keyoung Lee, 2015. "Whither News Shocks?," NBER Macroeconomics Annual, University of Chicago Press, vol. 29(1), pages 225-264.
      • Robert B. Barsky & Susanto Basu & Keyoung Lee, 2014. "Whither News Shocks?," NBER Chapters,in: NBER Macroeconomics Annual 2014, Volume 29, pages 225-264 National Bureau of Economic Research, Inc.
    4. Beaudry, Paul & Moura, Alban & Portier, Franck, 2015. "Reexamining the cyclical behavior of the relative price of investment," Economics Letters, Elsevier, vol. 135(C), pages 108-111.

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