We study models of credit with limited commitment, which implies endogenous borrowing constraints. We show that there are multiple stationary equilibria, as well as nonstationary equilibria, including some that display deterministic cyclic and chaotic dynamics. There are also stochastic (sunspot) equilibria, in which credit conditions change randomly over time, even though fundamentals are dete...

We examine a general equilibrium model with collateral constraints and increasing returns to scale in production. The utility function is nonseparable, with no income e¤ect on the consumer’s choice of leisure. Unlike this model without a collateral constraint, we …nd that indeterminacy of equilibria is possible. Hence, business cycles can be driven by self-ful…lling expectations. This is the ca...

Real-business-cycle models rely on total factor productivity (TFP) shocks to explain the observed co-movement between consumption, investment and hours. However an emerging body of evidence identifies “investment shocks”as important drivers of business cycles. This paper shows that a neoclassical model consistent with observed heterogeneity in labor supply and consumption across employed and no...

In this paper the time series properties of the outcomes of two different specifications of a nonparametric productivity analysis are compared using data for threeand four-digit U.S. manufacturing industries over the period 1958-96. The first model is standard and does not account for variations of capacity utilization of the production factors whereas the second model does. Correcting for util...

This paper introduces dynamic predictor selection into a New Keynesian model with heterogeneous expectations and examines its implications for monetary policy. We extend Branch and McGough (2006) by endogenizing the fraction of rational versus adaptive agents along the lines of Brock and Hommes (1997). We show that models that are determinate under the assumption of full rationality may possess...

I investigate cointegrating relationships such that, even though the long-run attractors are assumed to be linear, the dynamics of the equilibrium errors depends on the business cycle. I postulate a Markov-switching common stochastic trends model to study both the short-run responses to permanent shocks and the e/ects of recessions in the long-run growth. I apply these 0ndings to explore the sh...

We study a production economy with regime switching in the conditional mean and volatility of productivity growth. The representative agent has generalized disappointment aversion (GDA) preferences. We show that volatility risk in productivity growth carries a positive and sizable risk premium in levered equity. Our model can endogenously generate long-run risks in the volatility of consumption...

The classical cobweb theorem is extended to include production lags and price forecasts. Price forecasting based on a longer period has a stabilizing effect on prices. Longer production lags do not necessarily lead to unstable prices; very long lags lead to cycles of constant amplitude. The classical cobweb requires elasticity of demand to be greater than that of supply; this is not necessarily...

A search-theoretic model of equilibrium unemployment is constructed and shown to be consistent with the key regularities of the labor market and business cycle. The two distinguishing features of the model are: (i) the decision to accept or reject jobs is modeled explicitly, and (ii) markets are incomplete. The model is well suited to address a number of interesting policy questions. Two such a...

Forward-looking monetary models with Taylor-type interest rate rules are known to generate indeterminacies, with a potential dependence on extraneous “sunspots,” for some structural and policy parameters. We investigate the stability of these solutions under adaptive learning, focusing on “common factor” or “resonant frequency” representations in which the observed sunspot has a suitable time-s...