We introduce two modifications into the standard real business cycle model : habit persistence preferences and limitations on intersectoral factor mobility.The resulting model is consistent with the observed mean equity premium, mean risk free rate and Sharpe ratio on equity.With respect to the conventional measures of business cycle volatility and comovement, the model does roughly as well as the standard real business cycle model . On four other dimensions its business cycle implications represent a substantial improvement. It accounts for (i) persistence in output, (ii) the observation that employment across different sectors moves together over the business cycle, (iii) the evidence of excess sensitivity' of consumption growth to output growth, and (iv) the `inverted leading indicator property of interest rates, 'that high interest rates are negatively correlated with future output.
"A Theory of Growth Cycles"
(with Jesus Fernandez-Villaverde)
Prelimnary Version: November 3, 2005
This paper investigates the role of labor-saving technological choices in the generation and propagation of business cycles. We emphasize the importance of endogenously varying relative factor prices as a force behind the introduction of new technologies and the scrapping of existing ones. To do so, we mix pieces of Smith, Marx, Ramsey, Von Neumann, Hicks, Goodwin, Paella, Prescott, Canoce, Tronti, Ortega y Gasset, and many unquoted or onquotable others. VERY AND TRULY PRELIMINARY AND INCOMPLETE. HANDLE WITH CARE, PLEASE .
Things I am working on -- forthcoming papers... ..
"What if Factor Shares are Not Constant? Implications for Growth and Business Cycle Theories"
(With Carmen Carrido Ruiz, Universidad Carlos III, Madrid) Extended Abstract