Understanding Non-Inflationary Demand Driven Business Cycles

Franck Portier () and Paul Beaudry

No 434, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: During the last thirty years, US business cycles have been characterized by coun- tercyclical technology shocks and very low inflation variability. While the first fact runs counter to an RBC view of fluctuation and calls for demand shocks as a source of fluctuations, the second fact is difficult to reconcile with a New Keynesian model in which demand shocks are accommodated. In this paper we show that non-inflationary demand driven business cycles can be easily explained if one moves away from the rep- resentative agent framework on which the New Keynesian model and the RBC model are based. We show how changes in demand induced by changes in perceptions about the future can cause business cycle type fluctuations when agents are not perfectly mobile across sectors. As we use an extremely simple framework, we discuss the gener- ality of the results and develop a modified New Keynesian model with non inflationary demand driven fluctuations. We also document the relevance of our main assumptions regarding labor market segmentation and incomplete insurance using PSID data over the period 1968-2007.

Date: 2013
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (4)

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Chapter: Understanding Noninflationary Demand-Driven Business Cycles (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:434

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