Skills, Sunspots and Cycles

University of Aarhus Department of Economics Working Paper No. 2006-7

30 Pages Posted: 18 Jun 2008

See all articles by Francesco Busato

Francesco Busato

Aarhus University - School of Business and Social Sciences

Enrico Marchetti

University of Rome - La Sapienza

Date Written: May 31, 2006

Abstract

This paper explores the ability of a class of one-sector, multi-input models to generate indeterminate equilibrium paths, and endogenous cycles, without relying on factors' hoarding. The model presents a novel theoretical economic mechanism that supports sunspot-driven expansions without requiring upward sloping labor demand schedules. Its distinctive characteristic is that the skill composition of aggregate labor demand drives expansionary i.i.d. demand shocks. Next, the model explains the labor market dynamics from the supply side, while endogenizing the capital productivity response to changes in the aggregate labor demand composition. Last but not least, it is worth to mention that the model presents an effective shock propagation mechanism that operates into the labor market and across labor market segments through the cross elasticities of equilibrium labor demand and supplies. In this respect the model can be seen as quite general formulation (with or without aggregate increasing returns to scale) for analyzing labor market dynamics within a general equilibrium model with labor market segmentation.

Keywords: Indeterminacy and Sunspots, Skills

JEL Classification: O40, J24

Suggested Citation

Busato, Francesco and Marchetti, Enrico, Skills, Sunspots and Cycles (May 31, 2006). University of Aarhus Department of Economics Working Paper No. 2006-7, Available at SSRN: https://ssrn.com/abstract=1147066 or http://dx.doi.org/10.2139/ssrn.1147066

Francesco Busato (Contact Author)

Aarhus University - School of Business and Social Sciences ( email )

Building 350
DK-8000 Aarhus C
Denmark
+45 8942 1133 (Phone)
+45 8613 6334 (Fax)

HOME PAGE: http://www.econ.au.dk/afn

Enrico Marchetti

University of Rome - La Sapienza ( email )

via del Castro Laurenziano, 9
Rome, RM 00161
Italy

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