Persistence of business cycles in multisector real business cycle models

Abstract

In this paper we explore whether the changing composition of output in response to technology shocks can play a significant role in the propagation of shocks over time. For this purpose we study two multisector real business cycle models, with two and three sectors. We find that, although the two‐sector model requires a high intertemporal elasticity of substitution of consumption to match the various dynamic properties of US macroeconomic data, the three‐sector model has a strong propagation mechanism under conventional parameterizations, as long as the factor intensities in the three sectors are different enough.

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