Viewing technology shocks as the primary source of business cycles has resulted in many "puzzles" or counter-factual predictions of general equilibrium theory with respect to international movements of output, consumption, investment, employment, and net exports (Backus, Kehoe and Kydland, JPE...

In this paper, we construct a simple model based on heterogeneity in workers' productivity and homogeneity in their working schedules. This simple model can generate unemployment, even if wages adjust instantaneously, firms are perfectly competitive and can perfectly observe workers'...

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...

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...

Conventional wisdom emphasizes supply and demand shocks as the major sources of the business cycle. Yet the most visible, most synchronized, and most frequently encountered supply and demand shocks take place at the seasons. The central question to be addressed in this paper is to what extent...

Necessary conditions for indeterminacy in standard RBC models have been extensively studied, but intuitive understanding of the economic mechanism that generates indeterminacy has yet to be fully explored. Following the permanent income theory, this paper provides an alternative framework for...