Intermediate Goods and Business Cycles: Implications for Productivity and Welfare

Susanto Basu

American Economic Review, 1995, vol. 85, issue 3, 512-31

Abstract: This paper presents an aggregate demand-driven model of business cycles that provides a new explanation for the procyclicality of productivity and simultaneously predicts large welfare losses from monetary nonneutrality. The key features of the model are an input-output production structure; imperfect competition; countercyclical markups; and, for some results, state-dependent price rigidity. True technical efficiency is procyclical even though production takes place with constant returns, without technology shocks or technological externalities. The paper has observable implications that distinguish it empirically from related work. These implications are generally supported by data from U.S. manufacturing industries. Copyright 1995 by American Economic Association.

Date: 1995
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Related works:
Working Paper: Intermediate Goods and Business Cycles: Implications for Productivity and Welfare (1994)
Working Paper: Intermediate Goods and Business Cycles: Implications for Productivity and Welfare (1993)
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