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Increasing Returns, Durables and Economic Fluctuations

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  • Kevin M. Murphy
  • Andrei Shleifer
  • Robert W. Vishny

Abstract

We describe an economy where a durable good is produced with an increasing returns to scale technology. Equilibria in this economy take the form of business cycles in which consumption fluctuates too much and is too low on average. A 2-sector version of this economy with imperfect credit and immobile labor also exhibits aggregate business cycles, in which outputs and labor inputs in different sectors move together. The model is consistent with a broad range of evidence on economic fluctuations.

Suggested Citation

  • Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1989. "Increasing Returns, Durables and Economic Fluctuations," NBER Working Papers 3014, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3014
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    References listed on IDEAS

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    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Diamond, Peter & Fudenberg, Drew, 1989. "Rational Expectations Business Cycles in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 606-619, June.
    3. Domowitz, Ian & Hubbard, R Glenn & Petersen, Bruce C, 1988. "Market Structure and Cyclical Fluctuations in U.S. Manufacturing," The Review of Economics and Statistics, MIT Press, vol. 70(1), pages 55-66, February.
    4. Bruce C. Greenwald & Joseph E. Stiglitz, 1993. "Financial Market Imperfections and Business Cycles," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 77-114.
    5. Weitzman, Martin L, 1982. "Increasing Returns and the Foundations of Unemployment Theory," Economic Journal, Royal Economic Society, vol. 92(368), pages 787-804, December.
    6. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1989. "Industrialization and the Big Push," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1003-1026, October.
    7. Oliver Hart, 1982. "A Model of Imperfect Competition with Keynesian Features," The Quarterly Journal of Economics, Oxford University Press, vol. 97(1), pages 109-138.
    8. Shapiro, Matthew D, 1987. "Are Cyclical Fluctuations in Productivity Due More to Supply Shocks or Demand Shocks?," American Economic Review, American Economic Association, vol. 77(2), pages 118-124, May.
    9. Shleifer, Andrei, 1986. "Implementation Cycles," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1163-1190, December.
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    11. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    12. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
    13. Peter Howitt & R. Preston McAfee, 1988. "Stability of Equilibria with Externalities," The Quarterly Journal of Economics, Oxford University Press, vol. 103(2), pages 261-277.
    14. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1989. "Building Blocks of Market Clearing Business Cycle Models," NBER Chapters,in: NBER Macroeconomics Annual 1989, Volume 4, pages 247-302 National Bureau of Economic Research, Inc.
    15. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-666, September.
    16. Robert E. Hall, 1986. "Market Structure and Macroeconomic Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(2), pages 285-338.
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    18. Eichenbaum, Martin, 1989. "Some Empirical Evidence on the Production Level and Production Cost Smoothing Models of Inventory Investment," American Economic Review, American Economic Association, vol. 79(4), pages 853-864, September.
    19. Mankiw, N Gregory, 1989. "Real Business Cycles: A New Keynesian Perspective," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 79-90, Summer.
    20. Nobuhiro Kiyotaki, 1988. "Multiple Expectational Equilibria Under Monopolistic Competition," The Quarterly Journal of Economics, Oxford University Press, vol. 103(4), pages 695-713.
    21. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
    22. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    23. Russell Cooper & John C. Haltiwanger, 1989. "Macroeconomic Implications of Production Bunching," NBER Working Papers 2976, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1989. "Building Blocks of Market Clearing Business Cycle Models," NBER Chapters,in: NBER Macroeconomics Annual 1989, Volume 4, pages 247-302 National Bureau of Economic Research, Inc.
    2. Shahid Yusuf & Kaoru Nabeshima, 2009. "Growth through Innovation : An Industrial Strategy for Shanghai," World Bank Other Operational Studies 18613, The World Bank.
    3. Cooper, Russell & Haltiwanger, John, 1996. "Evidence on Macroeconomic Complementarities," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 78-93, February.
    4. Cooper, Russell & Haltiwanger, John, 1993. "The Aggregate Implications of Machine Replacement: Theory and Evidence," American Economic Review, American Economic Association, vol. 83(3), pages 360-382, June.
    5. Russell Cooper & John C. Haltiwanger, 1989. "Macroeconomic Implications of Production Bunching," NBER Working Papers 2976, National Bureau of Economic Research, Inc.
    6. Michael Woodford, 1990. "Equilibrium Models of Endogenous Fluctuations: an Introduction," NBER Working Papers 3360, National Bureau of Economic Research, Inc.

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