REAL BUSINESS CYCLES AND STATIONARY MARKOV EQUILIBRIUM WITH GLOBAL HETEROGENEITY

Rodrigo Raad, Kevin Reffett and Łukasz Woźny
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Rodrigo Raad: Cedeplar/UFMG
Kevin Reffett: Arizona State University

No 689, Textos para Discussão Cedeplar-UFMG from Cedeplar, Universidade Federal de Minas Gerais

Abstract: This paper develops a stationary Markov general equilibrium model with heterogeneous agents, complete markets, and no frictions or imperfections, yet capable of generating aggregate business cycle dynamics endogenously. In contrast to prior literature that relies on market imperfections such as adjustment costs, financial constraints, or informational frictions to explain macroeconomic fluctuations, we show that cyclical behavior can emerge in fully efficient economies. The mechanism stems from the endogenous, price-mediated interaction of capital, consumption, and asset transaction flows across agents with diverse preferences and endowments. These flows induce persistent relative price movements that feed back into aggregate allocations, amplifying coordinated expansions and contractions without any deviation from Pareto efficiency. We conclude that pro-cyclical or counter-cyclical stabilization policies in such settings may not only be ineffective, but potentially welfare-reducing, as they interfere with efficient allocations and risk exacerbating public debt through unnecessary interventions.

Keywords: Multi-sector economy; recursive equilibrium; growth models; minimal state space; Real Business Cycles. (search for similar items in EconPapers)
JEL-codes: C61 C62 C68 D50 D52 D58 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2025-12
New Economics Papers: this item is included in nep-dge
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