Intermediate Goods and Business Cycles: Implications for Productivity and Welfare

Susanto Basu

NBER Working Paper No. 4817
Issued in August 1994
NBER Program(s):   ME

This paper presents an aggregate demand-driven model of business cycles that provides a new explanation for the procyclicality of productivity, and simultaneously predicts large welfare losses from monetary non-neutrality. The key features of the model are an input- output production structure, imperfect competition, countercyclical markups, and, for some results, state- dependent price rigidity. True technical efficiency is procyclical even though production takes place with constant returns, without technology shocks or technological externalities. The paper has observable implications that distinguish it empirically from related work. These implications are generally supported by data from U.S. manufacturing industries.

(441 K)

Published: American Economic Review, Vol. 85, no. 3 (1995): 512-531.

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