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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page Endogenous Business Cycles and the Dynamics of Output, Hours, and Consumption
Stephanie Schmitt-Grohe

Abstract: This paper studies the business-cycle fluctuations predicted by a two-sector endogenous-business-cycle model with sector-specific external increasing returns to scale. It focuses on aspects of actual fluctuations that have been identified both as defining features of the business cycle and as ones that standard real-business-cycle models cannot explain: the autocorrelation function of output growth, the impulse response function of output to demand shocks, and the forecastable movements of output, hours, and consumption. For empirically realistic calibrations of the degree of sector-specific external returns to scale, the results suggest that endogenous fluctuations do not provide the dynamic element that is missing in existing real-business-cycle models.

Keywords: Business cycles, expectations-driven fluctuations

Full paper (349 KB PDF) | Full paper (362 KB Postscript)

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Last update: May 14, 1998