AS-AD in the Standard Dynamic Neoclassical Model: Business Cycles and Growth Trends

Max Gillman

No 1222, CERS-IE WORKING PAPERS from Institute of Economics, Centre for Economic and Regional Studies

Abstract: The paper shows how a dynamic neoclassical AS-AD can be derived and used to describe business cycles and growth trends to undergraduates. Derived within the Ramsey-Cass-Koopmans (RCK) model, the AS-AD is the stationary equilibrium of the deterministic dynamic general equilibrium framework. Allowing Solow exogenous growth, the AS-AD is derived along the balanced growth path equilibrium. The derivation first builds consumption demand, aggregate demand, and then aggregate supply through the equilibrium conditions and a closed form solution for the capital stock. Through a comparative static change in goods sector productivity, the paper shows the basic failing of the standard RBC model. Allowing a second comparative static change in the consumer's time endowment, this captures a change in the "external margin" of labor supply. These comparative statics enable explanation of the business cycle, and "Solow-plus" growth trends including education time and working time. In extension of RCK, the paper shows beyond the undergraduate level, how to derive AS-AD when including human capital and endogenous growth. This allows an endogenous change in the time endowment for work and leisure through a change in human capital productivity, with a similar but more fundamental AS-AD story of business cycles and growth trends.

Keywords: Ramsey-Cass-Koopmans; supply; demand; state variable (search for similar items in EconPapers)
JEL-codes: A22 A23 E13 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2012-05
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: AS-AD in the Standard Dynamic Neoclassical Model: Business Cycles and Growth Trends (2012)
Working Paper: AS-AD in the Standard Dynamic Neoclassical Model: Business Cycles and Growth Trends (2012)
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