Indeterminacy, aggregate demand, and the real business cycle

Jess Benhabib, Yi Wen

    Research output: Contribution to journalArticle

    Abstract

    We show that under indeterminacy aggregate demand shocks are able to explain not only aspects of actual fluctuations that standard RBC models predict fairly well, but also aspects of actual fluctuations 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, Am. Econom. Rev. 85 (1995) 492); the large forecastable movements and comovements of output, consumption and hours (Rotemberg and Woodford, Am. Econom. Rev. 86 (1996) 71); 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.

    Original languageEnglish (US)
    Pages (from-to)503-530
    Number of pages28
    JournalJournal of Monetary Economics
    Volume51
    Issue number3
    DOIs
    StatePublished - Apr 2004

    Keywords

    • Capacity utilization
    • Demand shocks
    • Increasing-returns-to-scale
    • Indeterminacy
    • Real business cycles

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics

    Fingerprint Dive into the research topics of 'Indeterminacy, aggregate demand, and the real business cycle'. Together they form a unique fingerprint.

  • Cite this