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Liquidity Constraints, Heterogeneous Households and Sunspots Fluctuations

Author

Listed:
  • Jean-Paul Barinci

    (UEVE - Université d'Évry-Val-d'Essonne)

  • Arnaud Cheron

    (GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Le Mans Université, Research Center on Economics - EDHEC - EDHEC Business School - UCL - Université catholique de Lille)

  • François Langot

    (GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Le Mans Université, CEPREMAP - Centre pour la recherche économique et ses applications - ECO ENS-PSL - Département d'économie de l'ENS-PSL - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres)

Abstract

This paper is concerned with the empirical relevance of indeterminacy and sunspots in explaining the business cycle. It argues that financial constraints provide a propagation mechanism able to generate business cycle facts observed in data in response to sunspot shocks. This point is demonstrated using an equilibrium business cycle model featuring heterogeneous households, endogenous labor supply and liquidity constraints. We first show that the model exhibits indeterminacy for roughly constant returns to scale. We then establish that our model accounts for stylized facts that neither the standard RBC model nor previous sunspots models have been able to capture. More specifically, the model driven purely by sunspots matches the procyclical movements in aggregate consumption, and the positively correlated forecastable changes of basic macroeconomic variables.

Suggested Citation

  • Jean-Paul Barinci & Arnaud Cheron & François Langot, 2006. "Liquidity Constraints, Heterogeneous Households and Sunspots Fluctuations," Post-Print halshs-00754131, HAL.
  • Handle: RePEc:hal:journl:halshs-00754131
    DOI: 10.1017/S1365100506050280
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    References listed on IDEAS

    as
    1. Benhabib, Jess & Farmer, Roger E. A., 1996. "Indeterminacy and sector-specific externalities," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 421-443, June.
    2. Benhabib, Jess & Rogerson, Richard & Wright, Randall, 1991. "Homework in Macroeconomics: Household Production and Aggregate Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1166-1187, December.
    3. Schmitt-Grohe, Stephanie, 1997. "Comparing Four Models of Aggregate Fluctuations due to Self-Fulfilling Expectations," Journal of Economic Theory, Elsevier, vol. 72(1), pages 96-147, January.
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    5. Barinci, Jean-Paul & Cheron, Arnaud, 2001. "Sunspots and the Business Cycle in a Finance Constrained Economy," Journal of Economic Theory, Elsevier, vol. 97(1), pages 30-49, March.
    6. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, vol. 63(1), pages 42-72, June.
    7. Wen, Yi, 1998. "Capacity Utilization under Increasing Returns to Scale," Journal of Economic Theory, Elsevier, vol. 81(1), pages 7-36, July.
    8. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448, Elsevier.
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    11. Tullio Jappelli, 1990. "Who is Credit Constrained in the U. S. Economy?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 219-234.
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    Cited by:

    1. Hahn, Volker, 2014. "Transparency In Monetary Policy, Signaling, And Heterogeneous Information," Macroeconomic Dynamics, Cambridge University Press, vol. 18(2), pages 369-394, March.

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    More about this item

    Keywords

    Heterogeneity; Liquidity Constraints; Sunspots; Increasing Returns;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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