Working Paper: NBER ID: w4817
Authors: Susanto Basu
Abstract: This paper presents an aggregate demand-driven model of business cycles that provides a new explanation for the procyclicality of productivity, and simultaneously predicts large welfare losses from monetary non-neutrality. The key features of the model are an input- output production structure, imperfect competition, countercyclical markups, and, for some results, state- dependent price rigidity. True technical efficiency is procyclical even though production takes place with constant returns, without technology shocks or technological externalities. The paper has observable implications that distinguish it empirically from related work. These implications are generally supported by data from U.S. manufacturing industries.
Keywords: business cycles; productivity; welfare; intermediate goods; monetary nonneutrality
JEL Codes: E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aggregate demand (E00) | productivity (O49) |
| fixed costs of changing nominal prices (E30) | countercyclical markups (D43) |
| intermediate goods (L60) | price rigidity (D41) |
| price rigidity (D41) | welfare losses from business cycles (E32) |
| sectoral productivity (O49) | aggregate activity (E10) |