No abstract

We show that under indeterminacy aggregate demand shocks are able to explain not only aspects of actual fluctuations that standard RBC models predict fairly well, but also aspects of actual fluctuations that standard RBC models cannot explain, such as the hump-shaped, trend reverting impulse responses to transitory shocks found in US output (Cogley and Nason, AER, 1995); the large forecastable movements and comovements of output, consumption and hours (Rotemberg and Woodford, AER, 1996); and the fact that consumption appears to lead output and investment over the business cycle. Indeterminacy arises in our model due to capacity utilization and mild increasing returns to scale.

China’s housing prices have been growing nearly twice as fast as national income over the past decade, despite a high vacancy rate and a high rate of return to capital. This paper interprets China’s housing boom as a rational bubble emerging naturally from its economic transition. The bubble arises because high capital returns driven by resource reallocation are not sustainable in the long run. Rational expectations of a strong future demand for alternative stores of value can thus induce currently productive agents to speculate in the housing market. Our model can quantitatively account for China’s paradoxical housing boom. (JEL O16, O18, P24, P25, R21, R31)

Why is there inventory investment when its expected rate of return is strictly dominated by that of¯xed-capital investment? Why is inventory investment procyclical at business-cycle frequencies but countercyclical at the very high frequencies (e.g., 2-3 quarters per cycle)? Why does the variance of production exceed the variance of sales at the business-cycle frequencies but not so at the high frequencies? Why is inventory investment so volatile relative to GDP at the high frequencies but not so at the business cycle frequencies? Explaining these seemingly paradoxical features of inventory behavior is of great importance because for many years economists have speculated that understanding inventory°uctuations may provide the key to understanding the business cycle. This paper provides a general equilibrium analysis on inventory cycles and their relations to the business cycle. I show that in an environment where production andxed-capital investment cannot adjust instantaneously to respond to consumption demand shocks,¯rms opt to hold inventories in the short run so as to avoid stockout and to smooth production against demand uncertainty. These incentives for holding inventories in the short run have di®erent e®ects on inventory cycles across di®erent cyclical frequencies. At the high frequencies inventory°uctuations are dominated by the production-smoothing motive and at the business-cycle frequencies inventory°uctuations are dominated by the stockout-avoidance motive. Consequently, inventory investment appears to be countercyclical and volatile at the high frequencies but procyclical and relatively smooth at the business-cycle frequencies, production appears to be less volatile than sales at the high frequencies but more volatile than sales at the business-cycle frequencies. I also show that the inventory cycle and the business cycle are intimately related by sharing a common source of uncertainty -consumption demand, which leads to the phenomena that consumption Granger causes output and¯xed investment, that consumption comoves with output and¯xed investment, and that consumption appears to be smooth relative to output and¯xed investment.