A Contribution to the Theory of Business Cycles
Quarterly Journal of Economics
1992
An economy consisting of identical perfectly competitive firms with real liquidity costs and a one-period production lag has a locally unstable stationary equilibrium with complex eigenvalues for a wide range of parameters. Monetary policy aimed at stabilizing real balances can support nonstationary equilibrium paths that converge to a limit cycle, which has Keynesian features. The First Welfare Theorem does not hold because the price level appears in the production function through liquidity costs, so that production has a positive externality.
- DOI
- 10.2307/2118375
- Volume
- 107 (3)
- Pages
- 1071-1088
- Language
- en
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- Sources
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