The notion that business cycles are driven by demand shocks is subtle. I first review the conceptual and empirical challenges faced when trying to accommodate this notion in modern, micro-founded, general-equilibrium models. I next review my own research, which sheds new light on the observed business cycles by relaxing the common-knowledge restrictions of such models. My work shifts the focus from nominal rigidity to frictional coordination. It makes room for forces akin to animal spirits even when the equilibrium is unique. It allows demand shocks to generate realistic business cycles even when nominal rigidity is absent or undone by appropriate monetary policy. And it modifies the general-equilibrium predictions of workhorse macroeconomic models in manners that seem both conceptually appealing and empirically relevant.
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Document Object Identifier (DOI): 10.3386/w24178