The Business Cycle

Abstract

Good fiscal and monetary policy requires a clear understanding of the workings of the economy, especially what drives the business cycle—the periodic ups and downs in economic activity. This chapter examines data on hours worked in a cross section of economic sectors. It discusses the business cycle components of these data and show that the degree of comovement is substantial. A key component of real business cycle theory is a production technology. This is a relationship that specifies how much output a firm can obtain from a given amount of capital and labor resources. The standard real business cycle model imagines that households interact with firms in competitive markets, in which they supply labor and physical capital and demand goods for consumption and to add to their stock of capital. Several papers attempt to get at comovement by reducing the decline in the value of output in the consumption sector during booms.

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