Indeterminacy, aggregate demand, and the real business cycle ¬リニ

We show that under indeterminacy aggregate demand shocks are able to explain not only aspects of actual fluctuations that standard RBC models predict fairly well, but also aspects of actual fluctuations that standard RBCmodels cannot explain, such as the hump-shaped, trend reverting impulse responses to transitory shocks found in US output (Cogley and Nason, AER, 1995); the large forecastable movements and comovements of output, consumption and hours (Rotemberg and Woodford, AER, 1996); and the fact that consumption appears to lead output and investment over the business cycle. Indeterminacy arises in our model due to capacity utilization and mild increasing returns to scale. ∗We wish to thank an anonymous referee, Jordi Gali, Stephanie Schmitt-Grohé, Karl Shell and Martin Uribe for very helpful comments. Technical support from the C.V. Starr Center for Applied Economics at New York University and the Center for Analytical Economics at Cornell University is gratefully acknowledged.