An Exploration into Pigou's Theory of Cycles

45 Pages Posted: 25 Oct 2001

See all articles by Paul Beaudry

Paul Beaudry

University of British Columbia (UBC) - Vancouver School of Economics; National Bureau of Economic Research (NBER)

Franck Portier

University of Toulouse I - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ); Centre for Economic Policy Research (CEPR)

Date Written: October 2001

Abstract

This Paper proposes a model of business cycles in which recessions and booms arise as the result of difficulties encountered by agents in properly forecasting the economy's future needs in terms of capital. The idea has a long history in the macroeconomic literature, as reflected by the work of Pigou [1926]. The contribution of this Paper is twofold. First, we illustrate the type of general equilibrium structure that can give rise to such phenomena. Second, we examine the extent to which such a model can explain the observed pattern of US recessions (frequency, depth) without relying on technological regress. We argue that such a model may offer an explanation as to why recession appear to be driven by declines in aggregate demand even in the absence of any significant price rigidities, and may also help understand elements of the recent downturns in Asia.

Keywords: Recessions, equilibrium business cycles, technological progress, expectations

JEL Classification: C52, D58, E32

Suggested Citation

Beaudry, Paul and Portier, Franck, An Exploration into Pigou's Theory of Cycles (October 2001). Available at SSRN: https://ssrn.com/abstract=288357

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Franck Portier

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