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The Composition of Aggregate Demand , Division of Labor and the Business Cycle ∗ ( Job Market Paper ) Job Market Paper Please Go to the Latest Version !
| Content Provider | Semantic Scholar |
|---|---|
| Author | Karadaş, Ercan |
| Copyright Year | 2019 |
| Abstract | This paper introduces a new internal propagation mechanism into a baseline multi-sector real business cycle (RBC) model and shows how it significantly amplifies the impact of small exogenous shocks a long-standing quest in the RBC literature. The main motivation for the proposed mechanism is the following: the composition of consumption expenditures shows sizable cross-sectional differences across the population as a function of income and these differences determine the direction towards which people update their consumption bundle as their income change. In the proposed mechanism, these observations are modeled through two types of agents (L and H-skill) who differ in terms of the occupations that they are specialized in and the composition of their consumption baskets. In addition, both types of agents have income dependent (nonhomothetic) preferences which induce a strong desire to consume the good that the other type produces. To see how the resulting mechanism operates in response to a positive exogenous shock consider an innovator (H-skill) producing iPhones and a waiter (L-skill) producing dining services. A positive technology shock makes the innovator more productive and raises her income and with the additional income she purchases relatively more dining services. This, in turn, raises the waiter’s income as the demand for her labor services increases and with the additional income she purchases a new iPhone, which creates further incentive for the innovator to work more. Importantly this second round work incentive for the innovator is not directly related to the original technology shock but to the demand from the waiter and that is exactly why the model generates significantly more amplification compare to other comparable RBC models. I also discuss the way the same mechanism gives rise to an endogenous variation in the average capital content of the goods consumed over the business cycle and how this endogenous variation generates more persistence in the model. JEL Classification: E32, E30, E25 |
| File Format | PDF HTM / HTML |
| DOI | 10.2139/ssrn.3324722 |
| Alternate Webpage(s) | http://www.ercankaradas.com/wp-content/uploads/2019/01/Paper1.pdf |
| Alternate Webpage(s) | https://doi.org/10.2139/ssrn.3324722 |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
