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Liquidity Constraints, Heterogeneous Households And Sunspot Fluctuations

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  • BARINCI, JEAN-PAUL
  • CHÉRON, ARNAUD
  • LANGOT, FRANCOIS
Abstract
This paper is concerned with the empirical relevance of indeterminacy and sunspots in explaining the business cycle. It argues that financial constraints provide a propagation mechanism able to generate business cycle facts observed in data in response to sunspot shocks. This point is demonstrated using an equilibrium business cycle model featuring heterogeneous households, endogenous labor supply and liquidity constraints. We first show that the model exhibits indeterminacy for roughly constant returns to scale. We then establish that our model accounts for stylized facts that neither the standard RBC model nor previous sunspots models have been able to capture. More specifically, the model driven purely by sunspots matches the procyclical movements in aggregate consumption, and the positively correlated forecastable changes of basic macroeconomic variables.

Suggested Citation

  • Barinci, Jean-Paul & Chéron, Arnaud & Langot, Francois, 2006. "Liquidity Constraints, Heterogeneous Households And Sunspot Fluctuations," Macroeconomic Dynamics, Cambridge University Press, vol. 10(4), pages 529-544, September.
    • Handle: RePEc:cup:macdyn:v:10:y:2006:i:04:p:529-544_05
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    References listed on IDEAS

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    1. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448, Elsevier.
    2. Benhabib, Jess & Farmer, Roger E. A., 1996. "Indeterminacy and sector-specific externalities," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 421-443, June.
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    6. Woodford, Michael, 1986. "Stationary sunspot equilibria in a finance constrained economy," Journal of Economic Theory, Elsevier, vol. 40(1), pages 128-137, October.
    7. Barinci, Jean-Paul & Cheron, Arnaud, 2001. "Sunspots and the Business Cycle in a Finance Constrained Economy," Journal of Economic Theory, Elsevier, vol. 97(1), pages 30-49, March.
    8. Schmitt-Grohe, Stephanie, 1997. "Comparing Four Models of Aggregate Fluctuations due to Self-Fulfilling Expectations," Journal of Economic Theory, Elsevier, vol. 72(1), pages 96-147, January.
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    11. Wen, Yi, 1998. "Capacity Utilization under Increasing Returns to Scale," Journal of Economic Theory, Elsevier, vol. 81(1), pages 7-36, July.
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    Cited by:

    1. Hahn, Volker, 2014. "Transparency In Monetary Policy, Signaling, And Heterogeneous Information," Macroeconomic Dynamics, Cambridge University Press, vol. 18(2), pages 369-394, March.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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