Essays on growth and business cycles

This thesis comprises three essays on economic growth, business fluctuations, and the interaction between these two phenomena.

1. Long run policy analysis and long run growth. The long run impact of economic policy on the rate of economic expansion cannot be studied in the standard neoclassical growth model. In neoclassical economies the single factor responsible for sustained growth--technological progress--is exogenous. This essay develops a class of growth models suitable for long run policy analysis. In these models long run growth is ndogenous because it is not driven by exogenous productivity increases.

The economies we consider have constant returns to scale technologies and, hence, are consistent with the same stylized facts of economic development as the neoclassical model. Their policy implications are, however substantially different; they imply, for instance, that an income tax reduces permanently the rate of economic growth.

2. Business cycles with endogenous growth. This essay challenges the view that macroeconomic time series can be decomposed into a growth and a cycle component. To evaluate the merits of this dichotomy we consider a class of models in which sustained growth and business cycles arise endogenously and investigate whether these two components can be separated. In general the answer is no. The reason is that, in models which generate growth endogenously, temporary displacements to preferences or technology alter permanently the future path of the economy. Hence, there is no counterpart to the idea of business cycles as stationary, self-eliminating components.

3. Tractable heterogeneity and near steady state dynamics. This essay discusses the prospects for introducing heterogeneity of agents in real business cycle models. We show that computing the competitive equilibrium using linear-quadratic approximation methods is as simple in economies with heterogeneous agent as in representative agent environments. We discuss the patterns of heterogeneity compatible with the use of linear-quadratic approximations. The effect of replacing the aggregate productivity shock by agent-specific disturbances are also studied. The methods described in this essay allow us to develop real business cycle models that encompass international trade and financial intermediation.