Abstract
We show in this chapter that the business cycle can not be reduced to the real business cycles archetype. A monopolistic competition model with price adjustment costs, affected by technological and monetary shocks, better mimics the economic fluctuations in two countries with very different cyclical properties, namely France and the United States. An alternative version of the model with increasing returns to scale is also studied, and is shown to slightly modify the cyclical behavior of the benchmark model. With two independent shocks, one real, more specifically defined than the Solow residual, and one nominal, tne benchmark model gives an answer to these empirical puzzles, which were left unexplained by traditional RBC models.
Published Version
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