This paper presents an aggregate demand-driven model of business cycles that provides a new explanation for the procyclicality of productivity and simultaneously predicts large welfare losses from monetary nonneutrality. The key features of the model are an input-output production structure, imperfect competition, countercyclical markups, and for some results, state-dependent price rigidity. True technical efficiency is procyclical even though production takes place with constant returns, without technology shocks or technological externalities. The paper has observable implications that distinguish it empirically from related work. These implications are generally supported by data from U.S. manufacturing industries.

de Groot, Richter, and Throckmorton, 2018 argue that the model in Basu and Bundick, 2017 can match the empirical evidence only because the model assumes an asymptote in the economy's response to an uncertainty shock. In this Reply, we provide new results showing that our model's ability to match the data does not rely either on assuming preferences that imply an asymptote nor on a particular value of the intertemporal elasticity of substitution. We demonstrate that shifting to preferences that are not vulnerable to the Comment's critique does not change our previous conclusions about the propagation of uncertainty shocks to macroeconomic outcomes.

This paper examines the role of uncertainty shocks in a one-sector, representative-agent dynamic stochastic general-equilibrium model. When prices are exible, uncertainty shocks are not capable of producing business-cycle comovements among key macro variables. With countercyclical markups through sticky prices, however, uncertainty shocks can generate uctuations that are consistent with business cycles. Monetary policy usually plays a key role in osetting the negative impact of uncertainty shocks. If the central bank is constrained by the zero lower bound, then monetary policy can no longer perform its usual stabilizing function and higher uncertainty has even more negative eects on the economy. Calibrating the size of uncertainty shocks using uctuations in the VIX, we nd that increased uncertainty about the future may indeed have played a signicant role in worsening the Great Recession, which is consistent with statements by policymakers, economists, and the nancial press.

A typical two-digit industry in the United States appears to have approximately constant returns to scale. Three puzzles emerge, however. First, estimates rise at higher levels of aggregation. Second, apparent decreasing returns contradicts evidence of small economic profits. Third, estimates with value added differ substantially from those with gross output. A representative-firm paradigm cannot explain these puzzles but a simple story of aggregation over heterogeneous units can. The authors discuss implications of heterogeneity for calibrating one-sector macroeconomic models, showing that these models sometimes require firm-level parameters but at other times require the 'biased' aggregate parameters. Copyright 1997 by the University of Chicago.

Yes. We construct a measure of aggregate technology change, controlling for aggregation effects, varying utilization of capital and labor, nonconstant returns, and imperfect competition. On impact, when technology improves, input use and nonresidential investment fall sharply. Output changes little. With a lag of several years, inputs and investment return to normal and output rises strongly. The standard one-sector real-business-cycle model is not consistent with this evidence. The evidence is consistent, however, with simple sticky-price models, which predict the results we find: when technology improves, inputs and investment generally fall in the short run, and output itself may also fall.