Market structure and business cycles: Do nominal rigidities influence the importance of real shocks?

Dave, Chetan and Dressler, Scott (2007): Market structure and business cycles: Do nominal rigidities influence the importance of real shocks?

Abstract

This paper investigates the relative importance of shocks to total factor productivity (TFP) versus the marginal efficiency of investment (MEI) in explaining cyclical variations. The literature offers contrasting results: TFP shocks are important in neoclassical environments, while relatively unimportant in neo-Keynesian environments. A model with endogenous capital utilization captures both results depending upon the degree of nominal rigidity. In the model, MEI shocks create a wedge between the nominal returns on bonds and capital. Nominal rigidities activate this wedge and place the relative importance on MEI shocks, while TFP shocks dominate when prices are perfectly flexible.

• Item Type: MPRA Paper
• Institution: Villanova School of Business, Villanova University
• Language: English
• Keywords: Business Cycle Fluctuations; Nominal Rigidities; Exogenous Shocks
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation

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