Business Cycles

Thomas Winberry

A method for solving heterogeneous-agent models with aggregate shocks that replaces the infinite-dimensional distribution with a flexible parametric family, treats that family's moments as endogenous …

Jorge Miranda-Pinto · Daniel Murphy · Kieran James Walsh · Eric R. Young

A common observation from account-level bank data is that low-income, low-liquidity households often use additional income to repay debt rather than consume, and that household-level consumption is …

Anmol Bhandari · Thomas Bourany · David Evans · Mikhail Golosov

This paper reformulates perturbation approximation of heterogeneous-agent models as the problem of finding directional derivatives that solve small, analytically-characterized linear systems -- a …

Boyan Jovanovic · Peter L. Rousseau

AI can improve decisions, raise firm productivity, and accelerate human capital growth through its effect on signal quality in problem-solving tasks, but the consequences are heterogeneous across the …

Frank Smets · Raf Wouters

A sticky-price, sticky-wage dynamic general equilibrium model of the euro area, with habit formation, investment adjustment costs and variable capacity utilisation, is estimated by Bayesian methods on …

James H. Stock · Mark W. Watson

This Handbook of Macroeconomics chapter by James Stock and Mark Watson surveys the empirical relationship between the postwar U.S. business cycle, defined via a bandpass filter isolating fluctuations …

Finn E. Kydland · Edward C. Prescott

This 1990 Federal Reserve Bank of Minneapolis Quarterly Review paper argues that reporting business cycle facts without first assuming the data are generated by some probability model is a legitimate …

Gorkem Bostanci · Guillermo Ordoñez

The paper studies how the two roles of stock markets — revealing information about firms' fundamentals, which guides capital allocation, and providing liquidity — interact, arguing that when stocks …

V. V Chari · Patrick J. Kehoe · Ellen R. McGrattan

Chari, Kehoe, and McGrattan build a calibrated two-country sticky-price model with price-discriminating, staggered-price monopolists and find it can generate exchange-rate volatility and persistence …

Kevin X.D. Huang · Qinglai Meng · Jianpo Xue

This paper overturns the longstanding consensus established by Schmitt-Grohé and Uribe (1997) that relying on capital income tax adjustments to balance the government budget immunizes the economy …

Pablo Ottonello

Physical capital, like labour, can be "unemployed" — sitting idle while its owner searches for a buyer or tenant — and this paper documents that in the United States such idle capital is large, …

Ben S. Bernanke · Mark Gertler · Simon Gilchrist

Embedding a costly-state-verification debt contract -- in which a borrower's external finance premium depends inversely on net worth -- into an otherwise standard New Keynesian model, this chapter …

François R. Velde

Velde asks what happens to prices, wages, and output when the nominal money supply is cut literally overnight, and finds a real-world natural experiment in 1720s France, where the government …

David K. Backus · Gregor W. Smith

Nontraded goods had been invoked to explain several international puzzles at once -- persistent deviations from purchasing power parity, low cross-country consumption correlations, and real interest …

Ayşe İmrohoroğlu

Imrohoroglu asks whether the small welfare cost of business cycles found by Lucas (1987) -- who assumed individuals can perfectly insure against idiosyncratic risk -- still holds once that …

Valerie A. Ramey · Matthew D. Shapiro

This paper argues that the composition of government spending across sectors, not just its aggregate size, matters for its macroeconomic effects, because reallocating capital across sectors is costly. …

Stig V. Møller · Thomas Q. Pedersen · Sigurd A. M. Steffensen · Martin M. Andreasen

Using the Livingston survey - the longest-running U.S. survey of professional economists, running twice a year since June 1952 - this paper shows that the expected excess stock return implied by these …

Morten O. Ravn · Stephanie Schmitt-Grohé · Martín Uribe

If households form habits over individual goods rather than over a consumption aggregate, the demand a firm faces depends on its own past sales, its pricing problem becomes dynamic, and mark-ups turn …

Jiequn Han · Yucheng Yang · Weinan E

DeepHAM represents the distribution of agents through a small set of algorithmically-learned "generalized moments" and uses deep neural networks trained on directly simulated paths to globally solve …

Cristina Arellano

In a small open economy where a risk-averse government borrows from risk-neutral lenders using only non-contingent one-period bonds, default happens in equilibrium and happens in *recessions* -- the …

James H. Stock · Mark W. Watson

This 2012 Brookings Papers on Economic Activity paper by James Stock and Mark Watson asks whether the unusual severity of the 2007-09 recession and the weakness of the recovery that followed required …

Jonathon Hazell · Bledi Taska

Hazell and Taska use wages posted on online job vacancies — matched to job titles and establishment identifiers from Burning Glass Technologies — to measure the wage for new hires at the job level …

Alexandr Kopytov · Bineet Mishra · Kristoffer Nimark · Mathieu Taschereau-Dumouchel

This paper studies how firms' optimal technique choices under productivity uncertainty endogenously shape the structure of production networks and aggregate macroeconomic outcomes. Each sector chooses …

Hanno Kase · Leonardo Melosi · Matthias Rottner

By treating a nonlinear model's own parameters as extra "pseudo state variables" that a neural network learns to solve for across the entire parameter space at once, and by training a second network …

Craig Burnside · Martin Eichenbaum

This 1994 NBER working paper (published in the *American Economic Review*, December 1996, 86(5): 1154-1174) asks whether letting firms vary how intensively they use their existing capital stock -- a …

Nina Biljanovska · Francesco Grigoli · Martina Hengge

Economic policy uncertainty depresses growth in output, consumption and investment -- and about two-thirds of that effect comes from uncertainty originating in other countries rather than at home. …

Harold L. Cole

This 1988 International Economic Review paper by Harold Cole builds a minimal two-country, two-period model -- output in each of two projects per country is subject to i.i.d. country- and …

David Altig · Lawrence J. Christiano · Martin Eichenbaum · Jesper Lindé

Estimated New Keynesian models reconcile inertial inflation with Calvo pricing only by forcing firms to re-optimise prices once every two years or more, which micro price data contradict. Making …

Hanbaek Lee

The repeated transition method solves rich heterogeneous-agent models globally and without perfect foresight by exploiting the ergodicity of a long simulated path -- matching periods with similar …

Valerie A. Ramey · Sarah Zubairy

Using a newly constructed quarterly US data set spanning 1889–2015 — built specifically to include the large wars and deep recessions that the post-WWII sample most of the literature relies on simply …

Steven J. Davis · John Haltiwanger

Davis and Haltiwanger use a longitudinal establishment-level data set covering roughly 160,000 U.S. manufacturing establishments from 1972 to 1986 to document that gross job creation and destruction …

James H. Stock · Mark W. Watson

This 2002 NBER Macroeconomics Annual paper by James Stock and Mark Watson documents and investigates the "Great Moderation": the standard deviation of annual U.S. real GDP growth fell from 2.7% over …

Davide Debortoli · Jordi Galí

By building three nested HANK economies and then constructing a deliberately simple two-agent counterpart for each, this paper argues that what household heterogeneity does to aggregate output can be …

Adrien Auclert · Rodolfo Rigato · Matthew Rognlie · Ludwig Straub

This paper extends the "certainty equivalence" shortcut that makes first-order sequence-space methods fast for heterogeneous-agent models to second and third order, showing that these higher-order …

Per Krusell · Anthony A. Smith, Jr.

In a calibrated stochastic growth model where a continuum of households face partially uninsurable employment risk and can self-insure only by holding aggregate capital, the macroeconomic aggregates …

Paul A. Samuelson

This short 1939 note by Paul Samuelson formalizes Alvin Hansen's combination of Keynes's income-expenditure multiplier with the accelerator principle of induced private investment.

David K. Backus · Patrick J. Kehoe

Backus and Kehoe assemble at least a century of annual national-accounts data for ten countries (Australia, Canada, Denmark, Germany, Italy, Japan, Norway, Sweden, the United Kingdom, and the United …

David K. Backus · Patrick J. Kehoe · Finn E. Kydland

Backus, Kehoe, and Kydland build a two-country extension of Kydland and Prescott's (1982) closed-economy real-business-cycle model -- with complete international asset markets, country-specific …

Fabio Ghironi · Daisoon Kim · Galip Kemal Ozhan

Sanctions are increasingly used as an instrument of economic statecraft, yet their macroeconomic consequences—especially the transitional dynamics and their effects on business cycles—are poorly …

François Gourio · Anil K. Kashyap

Plant-level data from Chile and the U.S. show that swings in aggregate investment come almost entirely from changes in how many establishments are having an investment spike, not how big those spikes …

Jeremy Greenwood · Zvi Hercowitz · Gregory W. Huffman

Keynes's idea that shocks to the marginal efficiency of investment drive fluctuations is placed inside a neoclassical model in which firms choose how hard to run their capital; a shock that raises the …

Neville Francis · Valerie A. Ramey

This 2005 *Journal of Monetary Economics* paper (circulated as NBER Working Paper 8726, January 2002) subjects a startling empirical result -- that identified "technology shocks" appear to *reduce* …

Dirk Krueger · Kurt Mitman · Fabrizio Perri

Using PSID panel data and a calibrated heterogeneous-household business-cycle model, this chapter shows that a sufficiently large mass of low-wealth, non-hand-to-mouth households who sharply raise …

Alan J. Auerbach · Yuriy Gorodnichenko

This 2012 American Economic Journal: Economic Policy paper by Alan Auerbach and Yuriy Gorodnichenko estimates how government spending multipliers vary with the state of the business cycle, using a …

Robert E. Lucas

This 1980 paper by Robert Lucas argues that economic theories should be understood as explicit instructions for building fully articulated, artificial "analogue" economies, and traces business cycle …

Andreas Schaab

Using a new global solution method for a HANK model with counter-cyclical unemployment risk and a zero lower bound, this job-market paper shows that the dominant transmission channel of macroeconomic …

Adrien Auclert · Matthew Rognlie · Ludwig Straub

Estimating a heterogeneous-agent New Keynesian model with "sticky expectations" that simultaneously matches households' large immediate marginal propensities to consume and the hump-shaped aggregate …

Greg Kaplan · Giovanni L. Violante

This essay argues that the Great Recession exposed how badly representative-agent models capture household consumption behavior, and outlines the emerging Heterogeneous Agent New Keynesian (HANK) …

Ben S. Bernanke

Complementing Friedman and Schwartz's monetary account of the Great Depression, Bernanke argues that the banking panics and pervasive debtor insolvency of 1930-33 independently raised the real cost of …

Jonathan A. Parker

This 2011 *Journal of Economic Literature* forum essay by Jonathan Parker argues that as of early 2009 economists had no good measure of how government spending affects output specifically in a …

François Le Grand · Xavier Ragot

The Chamley-Judd result (1986) states that the optimal long-run capital income tax rate is zero in representative-agent models. This paper shows that introducing heterogeneous agents — specifically, …

Timothy Cogley · James M. Nason

This 1995 American Economic Review paper by Timothy Cogley and James Nason tests whether standard real-business-cycle (RBC) models can reproduce two well-documented stylized facts about U.S. GNP …

Silvia Miranda-Agrippino · Sinem Hacıoğlu-Hoke · Kristina Bluwstein

This paper constructs an instrumental variable for technology news shocks using patent applications, relaxing all identifying assumptions traditionally used in the news-shock literature. The IV is the …

John H. Cochrane

Using simple two-variable autoregressions of consumption and GNP, and of dividends and stock prices, Cochrane shows that a shock to GNP (or to stock prices) that leaves consumption (or dividends) …

Robert G. King · Charles I. Plosser · Sergio T. Rebelo

This 1988 Journal of Monetary Economics paper by Robert King, Charles Plosser, and Sergio Rebelo presents the neoclassical one-sector model of capital accumulation, augmented with a labor-leisure …

Jonathan Heathcote · Kjetil Storesletten · Giovanni L. Violante

This review organizes the quantitative macroeconomics literature on household heterogeneity around the "standard incomplete markets" model, asking what sources of individual risk matter most, what …

N. Gregory Mankiw

This 1989 Journal of Economic Perspectives essay by N. Gregory Mankiw is an explicitly partisan new Keynesian critique of real business cycle (RBC) theory, the then-ascendant view that business cycles …

Julio J. Rotemberg · Michael Woodford

This 1996 American Economic Review paper by Julio Rotemberg and Michael Woodford tests standard real-business-cycle (RBC) models against the forecastable -- rather than total -- movements in U.S. …

Edward C. Prescott

This 1986 Federal Reserve Bank of Minneapolis Quarterly Review piece is Edward Prescott's direct reply, in the same issue, to Lawrence Summers's "Some Skeptical Observations on Real Business Cycle …

Robert E. Lucas, Jr.

Writing for the 30th anniversary of Milton Friedman and Anna Schwartz's *A Monetary History of the United States, 1867-1960*, Lucas argues the book's lasting contribution is a normative one -- it …

Sebastian Di Tella · Robert Hall

This paper shows that spikes in idiosyncratic risk premiums can generate quantitatively plausible recessions -- with employment, consumption, and investment all falling together -- because the risk …

John H. Cochrane

Surveying the evidence for monetary, technology, oil-price, and credit shocks as drivers of postwar U.S. business cycles, Cochrane finds that none of these popular observable candidates robustly …

Frank Smets · Rafael Wouters

A New Neoclassical Synthesis model of the US economy with seven structural shocks and a full set of real and nominal frictions is estimated on seven quarterly series by Bayesian methods, and shown to …

Federico Mandelman · Mishita Mehra · Hewei Shen

High-skilled immigration policy frictions—particularly the H-1B visa lottery, fixed annual cap, and associated compliance costs—impose well-known burdens on firms, but their disproportionate impact on …

Christian Bayer · Ralph Luetticke

A solution method for discrete-time heterogeneous-agent models with aggregate risk that extends Reiter's perturbation approach by compressing the state space after the no-aggregate-risk stationary …

Adrien Bilal

Treating the cross-sectional distribution as an explicit state variable turns a heterogeneous-agent economy into a single, low-dimensional "Master Equation," and this paper shows that its first- and …

Lawrence H. Summers

This 1986 Federal Reserve Bank of Minneapolis Quarterly Review piece, responding directly to Edward Prescott's companion article "Theory Ahead of Business Cycle Measurement" in the same issue, argues …

V. V. Chari · Patrick J. Kehoe · Ellen R. McGrattan

Staggered price-setting was long hoped to turn a short spell of exogenous price stickiness into a long spell of endogenous stickiness, and so into persistent output movements after a monetary shock. …

Paul Beaudry · Franck Portier

This 2006 *American Economic Review* paper (circulated as NBER Working Paper 10548, June 2004) develops a novel way to use the joint behavior of stock prices and measured total factor productivity …

Yucheng Yang · Chiyuan Wang · Andreas Schaab · Benjamin Moll

By replacing the cross-sectional distribution with low-dimensional current prices as the state variable and letting agents learn equilibrium price dynamics from simulated paths -- while still …

Mark Gertler · Christopher Huckfeldt · Antonella Trigari

This paper measures and models the role of temporary layoffs (TL) in cyclical unemployment dynamics, motivating the analysis by the extraordinary surge in temporary layoffs at the onset of the …

Bruno Cavani · Samer F. Shousha

Textbook Mundell–Fleming logic says a weaker local currency should be expansionary through net exports, yet in emerging market economies (EMEs) a stronger US dollar has been consistently associated …

Iacopo Morchio · Christian Moser

This paper uses linked employer-employee data from Brazil (RAIS, 2007–2014, covering 267 million worker-years, 56 million unique workers, and 607,000 employers) to document that the gender pay gap of …

Diego Daruich

This paper embeds early childhood development (ECD) investment into a general-equilibrium (GE), heterogeneous-agent, overlapping-generations model calibrated to U.S. data in order to quantify the …

Fatih Guvenen · Serdar Ozkan · Jae Song

This 2014 *Journal of Political Economy* paper (circulated as Federal Reserve Bank of Minneapolis Staff Report 476, December 2012; the Minneapolis Fed's own hosting of this PDF is currently …

Andreas I. Mueller · Johannes Spinnewijn

This paper studies the sources of long-term unemployment (LTU, defined as failing to find a job within six months) using administrative data on the universe of unemployment spells in Sweden from 1992 …

Nils H. Lehr · Pascual Restrepo

Leading AI firms such as OpenAI and Anthropic publicly claim dual mandates of profit and social welfare, raising the question of whether—and how—a social mandate should change their pricing and …

Veasna Kheng · Lei Pan · Xiaodong Fan

This paper builds and estimates a small open economy real-business-cycle (SOE-RBC) model for Cambodia augmented with two non-standard external-sector shocks — net unilateral transfers (remittances and …

Robert B. Barsky · Jeffrey A. Miron

This 1989 Journal of Political Economy paper by Robert Barsky and Jeffrey Miron argues that the seasonal fluctuations ordinarily filtered out of macroeconomic data before business-cycle analysis …

Finn E. Kydland · Edward C. Prescott

This 1982 Econometrica paper by Finn Kydland and Edward Prescott builds an equilibrium growth model, fitted to post-war U.S. quarterly data, in which business-cycle fluctuations arise from technology …

Lawrence J. Christiano · Richard M. Todd

Investment projects begin with a long planning phase that consumes very little in the way of resources, and building that phase into an otherwise standard real business cycle model delays the response …

Ding Dong · Zheng Liu · Pengfei Wang

Firm-level evidence shows that recessions are characterized not just by aggregate downturns but by a sharp rise in turbulence—a reshuffling of firms' productivity rankings in which high-productivity …

Charles I. Plosser

This 1989 Journal of Economic Perspectives essay by Charles Plosser is a sympathetic introduction to real business cycle (RBC) theory, written as a counterpart to Mankiw's companion critique in the …

Nicholas Kozeniauskas

The entrepreneurship rate in the United States—defined as the share of the labor force who own and actively manage a business with at least ten employees—declined by 26% between 1987 and 2015, a …

SeHyoun Ahn · Greg Kaplan · Benjamin Moll · Thomas Winberry · Christian Wolf

This paper develops a continuous-time method for solving heterogeneous-agent models with aggregate shocks by linearizing around a nonlinearly computed stationary equilibrium (extending Reiter's …