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Business Cycle during Structural Change: Arthur Lewis' Theory from a Neoclassical Perspective

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  • Storesletten, Kjetil
  • Zhao, Bo
  • Zilibotti, Fabrizio

Abstract

We document that business cycles change during the process of development. In countries with large declining agricultural sectors, aggregate employment is uncorrelated with GDP. During booms, agricultural employment declines even though agricultural labor productivity increases relative to other sectors. We construct a unified theory of business cycles and structural change consistent with the stylized facts. The theory focuses on the simultaneous decline and modernization of agriculture. As capital accumulates, agriculture becomes increasingly capital intensive as traditional agriculture is crowded out. We estimate the model and show that it accounts well for both structural transformation and business cycle fluctuations in China.

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  • Storesletten, Kjetil & Zhao, Bo & Zilibotti, Fabrizio, 2020. "Business Cycle during Structural Change: Arthur Lewis' Theory from a Neoclassical Perspective," CEPR Discussion Papers 14964, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:14964
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    Cited by:

    1. Wen Yao & Xiaodong Zhu, 2021. "Structural Change And Aggregate Employment Fluctuations In China," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(1), pages 65-100, February.
    2. Alberto Dalmazzo & Guido de Blasio & Samuele Poy, 2021. "Gimme shelter. Public housing programs and industrialization. The INA-casa plan, Italy," Discussion Paper series in Regional Science & Economic Geography 2021-09, Gran Sasso Science Institute, Social Sciences, revised Jun 2021.
    3. Cooper Howes, 2020. "Why Does Structural Change Accelerate in Recessions? The Credit Reallocation Channel," Research Working Paper RWP 20-17, Federal Reserve Bank of Kansas City.
    4. Alberto Dalmazzo & Guido de Blasio & Samuele Poy, 2021. "Gimme shelter. Public housing programs and industrialization. The INA-casa plan, Italy," Discussion Paper series in Regional Science & Economic Geography 2021-09, Gran Sasso Science Institute, Social Sciences, revised Jun 2021.
    5. Blanco, Cesar & Diz, Sebastian, 2021. "Optimal monetary policy with non-homothetic preferences," MPRA Paper 107427, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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