Non-Convexities in Quantitative General Equilibrium Studies of Business Cycles*

_________________________________________________________________________ This paper reviews the role of micro non-convexities in the study of business cycles. One important nonconvexity arises because an individual can work only one workweek length in a given week. The implication of this non-convexity is that the aggregate intertemporal elasticity of labor supply is large and the principal margin of adjustment is in the number employed—not in the hours per person employed—as observed. The paper also reviews a business cycle model with an occasionally binding capacity constraint. This model better mimics business cycle fluctuations than the standard real business cycle model. Aggregation in the presence of micro non-convexities is key in the model. _____________________________________________________________________________________ *Paper prepared for the conference “Frontiers in Applied General Equilibrium Modeling,” Cowles Foundation, Yale University, April 5 and 6, 2002. The author acknowledges financial support of the National Science Foundations. The author thanks Sami Alpanda, Andreas Hornstein, and Alexander Ueberfeldt for comments and discussions. The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.