Using a rational expectations model of profit maximizing firms facing demand uncertainty, this paper derives a closed-form relationship between the optimal volume of labor hoarding and other important economic variables such as profit, expected demand, interest rate, inventory level, output...

Why is there inventory investment when its expected rate of return is strictly dominated by that of fixed-capital investment? Why is inventory investment procyclical at business-cycle frequencies but countercyclical at the very high frequencies (e.g., 2-3 quarters per cycle)? Why does the...

In this paper we show that the highly persistent inflation dynamics and its lead-lag relationship with output can be explained by a standard flexible price RBC model augmented with endogenous monetary policy. Endogenous monetary policy acting upon the illusion that price is sticky and money is...

The point of this paper is that if output is durable then optimal behavior of a supplier is characterized by production smoothing. Durability of goods (such as capital) has opposite effects on the supply of the goods. Higher durability on the one hand raises the variability of investment demand...

This paper provides new empirical evidence on and theoretical support for the close link between oil prices and aggregate macroeconomic performance in the 1970s. Although this link has been well documented in the empirical literature and is further confirmed in this paper, standard economic...

Consumption in the US leads output at the business cycle frequency. Standard RBC models predict the opposite. We show in this paper that the lack of an endogenous propagation mechanism that can support demand shocks is responsible for the discrepancy between RBC theory and data.

Despite the important role played by durable goods production and inventory investment in the business cycle, theoretical models featuring durable goods inventories are rarely available in the literature. This paper provides a simple dynamic optimization model of durable goods inventories and...

We show that dependence of production on foreign inputs (or non-producible natural resources) can significantly increase the likelihood of indeterminacy. Payment of imported foreign factors of production may act as a semi-fixed cost, amplifying production externalities and returns to scale,...

Price rigidity is the key mechanism for propagating business cycles in traditional Keynesian theory. Yet the New Keynesian literature has failed to show that sticky prices by itself can effectively propagate business cycles in general equilibrium. This situation may be a direct consequence of...

We show that under indeterminacy aggregate demand shocks are able to explain not only aspects of actual °uctuations that standard RBC models predict fairly well, but also aspects of actual °uctuations that standard RBC models cannot explain, such as the hump-shaped, trend reverting impulse...