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Lost in Translation: Unified Consumption Theory, Dynamic AS-AD, and Business Cycles

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  • Max Gillman

    ()

    (Cardiff Business School and Institute of Economics-Research Centre for Economic and Regional Studies Hungarian Academy of Sciences)

Abstract

The paper shows how aggregate AS-AD can be derived within the standard neoclassical dynamic setting known as the Ramsey-Cass- Koopmans (RCK) model. AS-AD is the stationary equilibrium of the deterministic dynamic general equilibrium framework. The derivation builds a permanent income type consumption demand that corresponds to a consumption theory that depends on current income, illustrating analytically how to unify the alternative theories within RCK. With permanent income de.ned by the flow on time and goods endowments, the logic of changing both endowments simultaneously coincides with changing the external labor margin along with goods sector productivity in order to explain business cycles. This gives rise to a stylistic AS-AD explanation of the business cycle that is consistent with the primary features of the RBC literature and consumption theory.

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Paper provided by Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 1305.

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Length: 23 pages
Date of creation: Jan 2013
Date of revision:
Handle: RePEc:has:discpr:1305
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Keywords: Ramsey-Cass-Koopmans; supply; demand; state variable; external labor margin;

Find related papers by JEL classification:

  • A22 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Undergraduate
  • A23 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Graduate
  • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical

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  1. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  2. Paul Gomme & Peter Rupert, 2005. "Theory, measurement, and calibration of macroeconomic models," Working Paper 0505, Federal Reserve Bank of Cleveland.
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  13. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  14. Ben S. Bernanke & Refet S. Gürkaynak, 2002. "Is Growth Exogenous? Taking Mankiw, Romer, and Weil Seriously," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 11-72 National Bureau of Economic Research, Inc.
  15. David Colander, 1995. "The Stories We Tell: A Reconsideration of AS/AD Analysis," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 169-188, Summer.
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  17. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  18. Harberger, Arnold C, 1998. "A Vision of the Growth Process," American Economic Review, American Economic Association, vol. 88(1), pages 1-32, March.
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  20. Marco Maffezzoli, 1998. "Online Appendix to Human Capital and International Real Business Cycles," Technical Appendices maffezzoli00, Review of Economic Dynamics.
  21. Max Gillman, 1999. "On Keynes's Theory of the Aggregate Price Level in the Treatise: Any Help for Modern Aggregate Analysis?," CASE-CEU Working Papers 0029, CASE-Center for Social and Economic Research.
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