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Indeterminacy, Aggregate Demand, and the Real Business Cycle

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  • 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.

Suggested Citation

  • Benhabib, Jess & Wen, Yi, 2001. "Indeterminacy, Aggregate Demand, and the Real Business Cycle," Working Papers 01-09r, Cornell University, Center for Analytic Economics.
  • Handle: RePEc:ecl:corcae:01-09r
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