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Indeterminacy, Aggregate Demand, and the Real Business Cycle

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Listed author(s):
  • Benhabib, Jess

    (New York U)

  • Wen, Yi

    (Cornell U)

Abstract

We show that under indeterminacy aggregate demand shocks are able to explain not only aspects of actual °uctuations that standard RBC models predict fairly well, but also aspects of actual °uctuations that standard RBC models cannot explain, such as the hump-shaped, trend reverting impulse responses to transitory shocks found in US output (Cogley and Nason, AER, 1995); the large forecastable movements and comovements of output, consumption and hours (Rotemberg and Woodford, AER, 1996); and the fact that consumption appears to lead output and investment over the business cycle. Indeterminacy arises in our model due to capacity utilization and mild increasing returns to scale.

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File URL: https://cae.economics.cornell.edu/jess_yi3.pdf
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Paper provided by Cornell University, Center for Analytic Economics in its series Working Papers with number 01-09r.

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Date of creation: Jan 2001
Handle: RePEc:ecl:corcae:01-09r
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  5. Benhabib, Jess & Farmer, Roger E. A., 1996. "Indeterminacy and sector-specific externalities," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 421-443, June.
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