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Accounting for Business Cycles in Canada: I. The Role of Supply-Side Factors

Accolley, Delali (2016): Accounting for Business Cycles in Canada: I. The Role of Supply-Side Factors.

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Abstract

After documenting business cycle facts in Canada, I have explained them using some popular models, which include: the indivisible labor, the time-to-build, the investment-specific technological change, the household production, and the human capital accumulation models. The common features of these models called real business cycle models are: the use of the neoclassical growth framework, the assumption that prices are flexible, and the reliance on supply-side factors, mainly technological change, to explain business cycles.

I have assessed the ability of these models to replicate some striking features of business cycles, which are: the high persistence in the fluctuations of the aggregate economic variables, the high correlation between total hours worked and output, and the absence of correlation between average hours worked and productivity. The model that passes these three tests is the household production model augmented with a human capital accumulation sector. All alone, the household production model replicates the persistence in the dynamics of the aggregate variables but has to rely on the endogenous growth mechanism to generate the near-zero correlation between average hours worked and productivity.

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