Endogenous Business Cycles and the Economic Response to Exogenous Shocks

Stephane Hallegatte and Michael Ghil
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Michael Ghil: University of California

No 2007.20, Working Papers from Fondazione Eni Enrico Mattei

Abstract: In this paper, we investigate the macroeconomic response to exogenous shocks, namely natural disasters and stochastic productivity shocks. To do so, we make use of an endogenous business cycle model in which cyclical behavior arises from the investment–profit instability; the amplitude of this instability is constrained by the increase in labor costs and the inertia of production capacity and thus results in a finite-amplitude business cycle. This model is found to exhibit a larger response to natural disasters during expansions than during recessions, because the exogenous shock amplifies pre-existing disequilibria when occurring during expansions, while the existence of unused resources during recessions allows for damping the shock. Our model also shows a higher output variability in response to stochastic productivity shocks during expansions than during recessions. This finding is at odds with the classical real-cycle theory, but it is supported by the analysis of quarterly U.S. Gross Domestic Product series; the latter series exhibits, on average, a variability that is 2.6 times larger during expansions than during recessions.

Keywords: Business cycles; Natural disasters; Productivity shocks; Output variability (search for similar items in EconPapers)
JEL-codes: E01 E20 E32 E40 Q54 (search for similar items in EconPapers)
Date: 2007-02
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (6)

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Working Paper: Endogenous Business Cycles and the Economic Response to Exogenous Shocks (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2007.20

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