We compare "real business cycle" and increasing returns models of
economic fluctuations. In these models, business cycles are driven by
productivity changes resulting either from technology shocks or from crucial
building blocks that give both types of models hope of fitting the data.
These building blocks include durability of goods, specialized labor,
imperfect credit and elastic labor supply. We also present new evidence on
comovernent of both outputs sand labor inputs across sectors and on the
increasing returns model is easier to reconcile with the data than the real
business cycle model.
*Published: This paper was subsequently published as Building Blocks of Market Clearing Business Cycle Models, Kevin M. Murphy, Andrei Shleifer, Robert W. Vishny, in NBER book NBER Macroeconomics Annual 1989, Volume 4 (1989)
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