Relative Demand Shocks

Francesco Busato ()

Economics Working Papers from School of Economics and Management, University of Aarhus

Abstract: This paper introduces the concept of relative demand shocks into a multi-sector dynamic general equilibrium model. Relative demand shocks change the instantaneous structure of preferences. Under relative demand shocks consumer tastes randomly shift across different commodities, as manifested by unexpected relative increases or decreases in the marginal utility of the various consumption goods. There are no exogenous technology (productivity) shocks in the model. There are three main results. First, the model proposes an original theoretical mechanism for generating aggregate fluctuations and sectoral comovement by using inter-sectoral and idiosyncratic shocks. This mechanism is complementary to the standard Real Business Cycle theory. Second, the model is effectively able to reproduce the main stylized facts of the U.S. economy, also those that the standard Real Business Cycle model fails to explain. Third, the model generates a false Solow Residual, even though there is no technological progress in the model. Its size and time series properties are analogous to the actual Solow Residual.

Keywords: Demand Shocks; Two-sector Dynamic General Equilibrium Models (search for similar items in EconPapers)
JEL-codes: F11 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc
Date: 2004-10-29
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Persistent link: http://EconPapers.repec.org/RePEc:aah:aarhec:2004-11

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