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Indeterminacy, Home Production, and the Business Cycle: a Calibrated Analysis

In this paper I present a business cycle model with one market sector that produces a standard good, and another that produces a non--market, or home, good. The model shows that business cycles can be driven only by self fulfilling expectations, although other shocks (e.g. to technology) may play a significant role as well. With respect to other models of this kind (e.g. Farmer and Guo [1994]) the model does not require an unconventional upward sloping aggregate labor demand. The presence of either productive externalities or market power is of course crucial, but their magnitude is sensibly smaller than in comparable models. The time series that are generated have properties that are comparable to the real U.S. postwar series.

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Paper provided by University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences in its series CARESS Working Papres with number 97-4.

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Handle: RePEc:wop:pennca:97-4
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  1. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1995. "Capital utilization and returns to scale," Working Paper Series, Macroeconomic Issues 95-5, Federal Reserve Bank of Chicago.
  2. Greenwood, Jeremy & Hercowitz, Zvi, 1991. "The Allocation of Capital and Time over the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1188-214, December.
  3. Benhabib Jess & Rustichini Aldo, 1994. "Introduction to the Symposium on Growth, Fluctuations, and Sunspots: Confronting the Data," Journal of Economic Theory, Elsevier, vol. 63(1), pages 1-18, June.
  4. Jess Benhabib & Roger E.A. Farmer, 1992. "Indeterminacy and Increasing Returns," UCLA Economics Working Papers 646, UCLA Department of Economics.
  5. Susanto Basu & John G. Fernald, 1995. "Aggregate Productivity and the Productivity of Aggregates," NBER Working Papers 5382, National Bureau of Economic Research, Inc.
  6. Rupert, Peter & Rogerson, Richard & Wright, Randall, 1995. "Estimating Substitution Elasticities in Household Production Models," Economic Theory, Springer, vol. 6(1), pages 179-93, June.
  7. Jordi GalĂ­, 1993. "Monopolistic competition, business cycles and the composition of aggregate demand," Economics Working Papers 45, Department of Economics and Business, Universitat Pompeu Fabra.
  8. Marimon Ramon & Spear Stephen E. & Sunder Shyam, 1993. "Expectationally Driven Market Volatility: An Experimental Study," Journal of Economic Theory, Elsevier, vol. 61(1), pages 74-103, October.
  9. Roger E.A. Farmer, 1994. "Indeterminacy and Sector-Specific Externalities," UCLA Economics Working Papers 722, UCLA Department of Economics.
  10. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Current Real-Business-Cycle Theories and Aggregate Labor-Market Fluctuations," American Economic Review, American Economic Association, vol. 82(3), pages 430-50, June.
  11. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  12. Ellen R. McGrattan & Richard Rogerson & Randall Wright, 1993. "Household production and taxation in the stochastic growth model," Staff Report 166, Federal Reserve Bank of Minneapolis.
  13. Benhabib, Jess & Rogerson, Richard & Wright, Randall, 1991. "Homework in Macroeconomics: Household Production and Aggregate Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1166-87, December.
  14. Michael Woodford, 1990. "Equilibrium Models of Endogenous Fluctuations: an Introduction," NBER Working Papers 3360, National Bureau of Economic Research, Inc.
  15. Marianne Baxter & Robert G. King, 1991. "Productive externalities and business cycles," Discussion Paper / Institute for Empirical Macroeconomics 53, Federal Reserve Bank of Minneapolis.
  16. Michael Woodford, 1990. "Self-Fulfilling Expectations and Fluctuations in Aggregate Demand," NBER Working Papers 3361, National Bureau of Economic Research, Inc.
  17. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  18. Caballero, R.J. & Lyons, R.K., 1991. "External Effects in U.S. Procyclical Productivity," Papers 91-19, Columbia - Graduate School of Business.
  19. Eisner, Robert, 1988. "Extended Accounts for National Income and Product," Journal of Economic Literature, American Economic Association, vol. 26(4), pages 1611-84, December.
  20. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, vol. 63(1), pages 42-72, June.
  21. Robert E. Hall, 1991. "Labor Demand, Labor Supply, and Employment Volatility," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 17-62 National Bureau of Economic Research, Inc.
  22. Julio J. Rotemberg & Michael Woodford, 1991. "Markups and the Business Cycle," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 63-140 National Bureau of Economic Research, Inc.
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