Market structure and business cycles: Do nominal rigidities influence the importance of real shocks?

Chetan Dave and Scott Dressler ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates the relative importance of shocks to total factor productivity (TFP) versus the marginal efficiency of investment (MEI) in explaining cyclical variations. The literature offers contrasting results: TFP shocks are important in neoclassical environments, while relatively unimportant in neo-Keynesian environments. A model with endogenous capital utilization captures both results depending upon the degree of nominal rigidity. In the model, MEI shocks create a wedge between the nominal returns on bonds and capital. Nominal rigidities activate this wedge and place the relative importance on MEI shocks, while TFP shocks dominate when prices are perfectly flexible.

Keywords: Business Cycle Fluctuations; Nominal Rigidities; Exogenous Shocks (search for similar items in EconPapers)
JEL-codes: C51 E32 (search for similar items in EconPapers)
Date: 2007-02
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:1794

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