Business cycles and government spending in a stage of processing model

Michael James Perigo, University of Pennsylvania


Two issues of fundamental macroeconomic importance are studied in an extension of the neoclassical model. The first issue addressed is the source and the nature of business cycle fluctuations, while the second issue addressed is the output, employment, and productivity effects of government purchases. The stage of processing model is a multi-good model, where goods are differentiated by different stages of processing. Production is the transformation of goods from one stage to the next, and there is a one-way flow of goods through the production process from materials to final goods. In this general equilibrium model, the relative price between the two goods is endogenous and plays an important role in determining the rate of production each period. The stage of processing structure highlights an important feature of the real world that is not captured by existing models. That feature is the ability of demand and supply shocks to change the costs and benefits of transforming one good into the next. The stage of processing structure lessens the reliance on large technology shocks and labor supply responses in the real business cycle literature and generates a new output effect of government purchases in a perfectly competitive neoclassical model.

Subject Area

Economics|Economic theory

Recommended Citation

Perigo, Michael James, "Business cycles and government spending in a stage of processing model" (1993). Dissertations available from ProQuest. AAI9413889.