A Perspective on Modern Business Cycle Theory
Year: 2011
Type: preprint
Abstract: In this article I provide a perspective on the current state of modern business cycle theory. This theory has developed from an application of the Arrow-Debreu general equilibrium framework to the neoclassical growth model. On the positive side, this approach is able to accommodate various sources of heterogeneity in preferences and production within its complete markets framework. On the negative side, this approach has to rely on persistent exogenous shocks to account for business cycles since its internal propagation mechanism is weak. I discuss the implications of three important extensions of the basic framework. The first two extensions, noncompetitive pricing and frictional labor markets, do not overcome the basic weakness of limited propagation. The third extension, limited insurance and exogenous credit constraints, shows promise to account for the amplification and propagation of exogenous shocks.
Source: SSRN Electronic Journal
Author: Nobuhiro Kiyotaki
Institution: Princeton University
Language: English
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2106244708