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Relative Demand Shocks

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  • Francesco Busato

    (Department of Economics, University of Aarhus, Denmark)

Abstract

This paper introduces the concept of relative demand shocks into a multi-sector dynamic general equilibrium model. Relative demand shocks change the instantaneous structure of preferences. Under relative demand shocks consumer tastes randomly shift across different commodities, as manifested by unexpected relative increases or decreases in the marginal utility of the various consumption goods. There are no exogenous technology (productivity) shocks in the model. There are three main results. First, the model proposes an original theoretical mechanism for generating aggregate fluctuations and sectoral comovement by using inter-sectoral and idiosyncratic shocks. This mechanism is complementary to the standard Real Business Cycle theory. Second, the model is effectively able to reproduce the main stylized facts of the U.S. economy, also those that the standard Real Business Cycle model fails to explain. Third, the model generates a false Solow Residual, even though there is no technological progress in the model. Its size and time series properties are analogous to the actual Solow Residual.

Suggested Citation

  • Francesco Busato, 2004. "Relative Demand Shocks," Economics Working Papers 2004-11, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:aarhec:2004-11
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    Cited by:

    1. Francesco Busato & Alessandro Girardi & Amadeo Argentiero, 2005. "Technology and non-technology shocks in a two-sector economy," Economics Working Papers 2005-11, Department of Economics and Business Economics, Aarhus University.
    2. Wang, Peng-fei & Wen, Yi, 2005. "Endogenous money or sticky prices?--comment on monetary non-neutrality and inflation dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 29(8), pages 1361-1383, August.

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    More about this item

    Keywords

    Demand Shocks; Two-sector Dynamic General Equilibrium Models;

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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