Working Paper: CEPR ID: DP8487
Authors: Paul Beaudry; Franck Portier
Abstract: Business cycles reflect changes over time in the amount of trade between individuals. In this paper we show that incorporating explicitly intra-temporal gains from trade between individuals into a macroeconomic model can provide new insight into the potential mechanisms driving economic fluctuations as well as modify key policy implications. We first show how a "gains from trade" approach can easily explain why changes in perceptions about the future (including "news" about the future) can cause booms and bust. We then turn to fiscal policy, and discuss under what conditions fiscal multipliers can be observed. While much of our analysis is conducted in a flexible price environment, we also present implications of our model for a sticky price environments, as it allows to understand stable-inflation boom-bust cycles. The source of the explicit gains from trade in our setup derives from simply assuming that in the short run workers are not perfect mobile across all sectors of the economy. We provide evidence from the PSID in support of this modeling assumption.
Keywords: Business Cycle; Fiscal Policy; Heterogeneous Agents; Investment; Monetary Policy
JEL Codes: E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| changes in perceptions about future returns on capital (G31) | expansions in consumption goods sector (E20) |
| changes in perceptions about future returns on capital (G31) | expansions in investment goods sector (E22) |
| optimistic perceptions (E66) | increased demand for goods produced by both sectors (E20) |
| government spending (H59) | multiplier effect greater than one (E19) |
| government spending directed at one sector (H59) | multiplier effect greater than one (E19) |
| segmented labor markets (J42) | multiplier effect greater than one (E19) |