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Relative-Preference Shifts and the Business Cycle

  • William Addessi and Francesco Busato
Published/Copyright: December 7, 2010
The B.E. Journal of Macroeconomics
From the journal The B.E. Journal of Macroeconomics Volume 10 Issue 1

This paper develops a two-sector dynamic general equilibrium model in which intertemporal fluctuations (and sectoral co-movement) are driven by idiosyncratic shocks to relative preferences among consumption goods. This class of shocks may be interpreted as shifts in consumer tastes. When shifts in preferences occur, consumers associate a new and different level of satisfaction to the same basket of consumption goods according to their modified preferences. This paper shows that if the initial composition of the consumption basket is sufficiently asymmetric, then a shift in relative preferences produces a “perception effect” strong enough to induce both intersectoral and intrasectoral positive co-movement of the main macroeconomic variables (i.e., output, consumption, investment, and employment). Furthermore, by extending the theoretical framework to a multisector model and introducing a more flexible structure for the relative-preference shock, we show that the parameter restrictions needed to observe sectoral co-movement after a relative-preference shock are much less severe. In particular, co-movement among most of the sectors emerges under general conditions, without requiring high levels of asymmetry in the consumption basket's composition and/or high aversion to risk. It is a welcome result that these findings are reached without introducing aggregate technology shocks, input-output linkages, or shocks perturbing the relative preference between aggregate consumption and leisure.

Keywords: demand shocks; two-sector dynamic general equilibrium
Published Online: 2010-12-7

©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston

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  3. Implementing Optimal Monetary Policy in New-Keynesian Models with Inertia
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  5. The Role of the Real Interest Rate in U.S. Macroeconomic History
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  7. The Link between the Economic Structure and Financial Development
  8. The Optimum Quantity of Money Revisited: Distortionary Taxation in a Search Model of Money
  9. Sufficient Conditions for Finite Objective Functions in DSGE Models with Deterministic and Stochastic Trends
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  17. Policy Irreversibility and Interest Rate Smoothing
  18. The Effect of Loss Experiences in a Banking Crisis on Future Expectations and Behavior
  19. The Importance of Commitment in the New Keynesian Model
  20. Relative-Preference Shifts and the Business Cycle
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  22. A Model of the Exchange Rate with Informational Frictions
  23. Communication, Innovation, and Growth
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https://doi.org/10.2202/1935-1690.2047
Keywords for this article
demand shocks; two-sector dynamic general equilibrium

Articles in the same Issue

  1. Topics Article
  2. Endogenous Growth, Habit Formation and Convergence Speed
  3. Implementing Optimal Monetary Policy in New-Keynesian Models with Inertia
  4. Capital Markets Integration and Labor Market Institutions
  5. The Role of the Real Interest Rate in U.S. Macroeconomic History
  6. Price Dynamics and Asymmetric Business Cycles under Mixed State and Time Dependent Pricing Rules
  7. The Link between the Economic Structure and Financial Development
  8. The Optimum Quantity of Money Revisited: Distortionary Taxation in a Search Model of Money
  9. Sufficient Conditions for Finite Objective Functions in DSGE Models with Deterministic and Stochastic Trends
  10. A Neoclassical Analysis of the Asian Crisis: Business Cycle Accounting for a Small Open Economy
  11. Aging, Retirement, and Savings: A General Equilibrium Analysis
  12. Non-Price Competition, Real Rigidities and Inflation Dynamics
  13. Stock Market Uncertainty and Monetary Policy Reaction Functions of the Federal Reserve Bank
  14. Inflation and Innovation-Driven Growth
  15. Financial Market Shocks during the Great Depression
  16. Inventories and Interest Rates: A Stage of Fabrication Approach
  17. Policy Irreversibility and Interest Rate Smoothing
  18. The Effect of Loss Experiences in a Banking Crisis on Future Expectations and Behavior
  19. The Importance of Commitment in the New Keynesian Model
  20. Relative-Preference Shifts and the Business Cycle
  21. Contributions Article
  22. A Model of the Exchange Rate with Informational Frictions
  23. Communication, Innovation, and Growth
  24. On-the-Job Search and Labor Market Equilibrium
  25. Investment-Specific Shocks and Cyclical Fluctuations in a Frictional Labor Market
  26. An Evaluation of Inflation Forecasts from Surveys Using Real-Time Data
  27. Public Sector Pension Policies and Capital Accumulation in an Emerging Economy: The Case of Brazil
  28. Employment Flows with Endogenous Financing Constraints
  29. Private Equity Returns in a Model of Entrepreneurial Choice with Learning
  30. Nominal Rigidities, News-Driven Business Cycles, and Monetary Policy
  31. How Much Can Engel's Law and Baumol's Disease Explain the Rise of Service Employment in the United States?
  32. Are DSGE Approximating Models Invariant to Shifts in Policy?
  33. Variable Search Intensity with Coordination Unemployment
  34. Households Forming Inflation Expectations: Active and Passive Absorption Rates
  35. Earnings Inequality and the Equity Premium
  36. Advances Article
  37. Demystifying the Equity Premium
  38. Is a Calvo Price Setting Model Consistent with Individual Price Data?
  39. The Impact of Aggregate and Sectoral Fluctuations on Training Decisions
  40. On Population Structure and Marriage Dynamics
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