Chapters 5 to 7 present business cycle models and their empirical application to detrended data of Germany and USA. This chapter makes the start with a very small model containing the central elements of my explanation of economic cyles. The equations of this model will appear in the same or slighty modified forms in all the models of the following chapters. The model is able to reproduce the stylized facts concerning the cyclical properties of fixed and inventory investment. It is based on the Second Order Accelerator (SOA) of investment and production. Models containing the SOA were introduced by Hillinger (Hillinger and Schüler 1977, 1978; Hillinger 1986, 1987) and further developed at SEMECON, Munich (recent contributions are Hillinger and Reiter 1992 and Reiter 1992). A microeconomic foundation of SOA models, including the derivation from an intertemporal optimization calculus and a theory of aggregation, are provided by Weser (1988, 1992) and Hillinger, Reiter and Weser (1992a). It should be noted that a very similar equation for fixed investment was used independently of Hillinger’s work by Gandolfo and Padoan (1984, 1990) as part of a model of the Italian economy. The inventory equation incorporates the production smoothing and the stock-out motive for holding inventories. It is similar to standard production smoothing models frequently used. It can also be interpreted as an SOA mechanism.
KeywordsCovariance Autocorrelation Volatility
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