The Cowles Commission approach is reviewed and compared to the approaches of real business cycle (RBC) theorists and new Keynesian economists. It is argued that RBC models are not tested in a serious enough way and that the new Keynesian literature is not empirical enough for testing even to be...

This paper shows that nominal price rigidity can arise from a failure to coordinate price changes. If a firm's desired price is increasing in others' prices, then the gains to the firm from adjusting its price after a nominal shock are greater if others adjust. This "strategic complementarity"...

An otherwise conventional Keynesian macro model is modified to include inventories of final goods by (1) drawing a distinction between production and final sales, and (2) allowing for a negative effect of the level of inventories on production. Two models are presented: one in which the labor...

This paper examines the relationship between green innovation and the business cycle, revealing that while non-green innovation is procyclical, green innovation is countercyclical. This pattern holds unconditionally over the business cycle and conditional on economic shocks. Motivated by these...

We develop a framework to analyze economies with agents facing time-varying concerns for model misspecification. These concerns lead agents to interpret economic outcomes and make decisions through the lens of a pessimistically biased 'worst-case' model. We combine survey data and implied...

Over the past thirty years, a great deal of business cycle research has been based on purely real models that abstract from the presence of nominal rigidities, and so (at least implicitly) assume that the Phillips curve is vertical. In this paper, I show that such models are fragile, in the...

We propose a new business cycle theory. Firms need to randomize over firing or keeping workers who have performed poorly in the past, in order to give them an ex-ante incentive to exert effort. Firms have an incentive to coordinate the outcome of their randomizations, as coordination allows them...

What is the driving force behind the cyclical behavior of unemployment and vacancies? What is the relation between job-creation incentives of firms and stock market valuations? We answer these questions in a model with time-varying risk, modeled as a small and variable probability of an economic...

There is a long tradition in macroeconomics suggesting that market imperfections may explain why economies repeatedly go through periods of booms and busts, with booms sowing the seeds of the subsequent busts. This idea can be captured mathematically as a limit cycle. For several reasons, limit...

We document that even though the normal distribution provides a good approximation to GDP fluctuations, it severely underpredicts "macroeconomic tail risks," that is, the frequency of large economic downturns. Using a multi-sector general equilibrium model, we show that the interplay of...