On Endogenous Competitive Business Cycles

Abstract

The belief that the long run equilibrium of a competitive monetary economy that does not experience any exogeneous shocks — whether originating from the external environment or from policy — should be modelled as a state that is stationary or perhaps growing at a constant rate, seems to be deeply rooted in the mind of some economists.

CEPREMAP, 140 rue du chevaleret, 75013 Paris, France. This is a short summary of a longer paper with the same title that is forthcoming in Econometrica, and that was presented at the Workshop on Price Adjustment, Quantity Adjustment and Business Cycles, in October 1983, at the Institute for Mathematics and its Applications of the University of Minnesota. I wish to thank warmly Hugo Sonnenschein who organized the meeting, our hosts, Leo Hurwicz, George Sell, Hans Weinberger, as well as Neil Wallace, who made my participation possible. Special thanks are due to the discussants of the paper, Daniel Goroff, Jose Scheinkman, Christopher Sims, Neil Wallace and Mike Woodford for their valuable comments and constructive criticisms. Financial support from the Frence Commissariat General du Plan, the University of Lausanne and the U.S. Office of Naval Research under contract 0NR-R00014–79-C-0685 at the Institute for Mathematical Studies in the Social Sciences at Stanford University is also gratefully acknowledged.