Project description
A closer look at an economic path from boom to bust
From boom to bust, the business cycle moves upward and downward – from expansion and peak to contraction and trough. Focussing on the business cycles – the rise and fall in production – the EU-funded BUCCAC project will study the output of goods and services. Each phase has a different level of GDP, unemployment and inflation, giving rise to questions regarding the dynamic macroeconomic effects on market power and the macroeconomic impact of expectational shocks. Specifically, the project will develop methods for dynamic causal analysis in the face of permanent and transitory shocks using external instruments. It will also produce a new narrative of regulatory changes. What is more, by constructing a quantitative theory, it will further our understanding of the impact of market power, focussing on intangible customer market effects.
Objective
Business cycles impact on a large cross-section of the population simultaneously and matters for welfare. Gordon Brown stated in 2002: “There will be no return to boom and bust” but in 2007/08 the Global Financial Crisis triggered the Great Recession, the deepest recession since the 1930s. Mainstream macro (representative agents, complete markets, competitive/monopolistic behavior, full information) was criticized rightly or wrongly for failing to predict the crisis. But the field is now undergoing a significant change introducing financial frictions, partial information, heterogeneous agents, non-competitive behavior etc. to study macroeconomic fluctuations. This high-risk project will make fundamental contributions to this new agenda and will do so in an ambitious and unusual integrative fashion using both empirical and theoretical approaches.
The proposal has three aims each of which has several sub-projects. The first focuses on methods for dynamic causal analysis. We develop methods for dynamic causal analysis in the face of permanent and transitory shocks using external instruments. The second provides new evidence on the sources of business cycles and their propagation. We examine the dynamic macroeconomic effects of “market power” by producing a new narrative record of regulatory changes. We will also study the macroeconomic impact of expectational shocks unrelated to “fundamental” shocks. The third aim builds quantitative theory. Dynamic general equilibrium models will be used understand the impact of market power focusing on intangible customer market effects. We apply heterogeneous agents models with aggregate shocks to examine financial frictions and macro prudential regulation in models with idiosyncratic risk. We study expectations-driven fluctuations in incomplete markets models. We estimate models with incomplete markets and price rigidities which provides a contribution across the three aims.
Fields of science
Programme(s)
Topic(s)
Funding Scheme
ERC-ADG - Advanced GrantHost institution
WC1E 6BT London
United Kingdom