Business cycles reflect changes over time in the amount of trade between individuals. In this paper we illustrate how incorporating explicitly intra-temporal gains from trade between individuals into a macroeconomic model can provide new insight into the potential mechanisms driving economic fluctuations as well as modify key policy implications. In particular, we show how a "gains from trade" approach can easily explain why changes in perceptions about the future can cause booms and bust, and we discuss under what conditions government spending can have a similar effect. Whilemuch of our analysis is conducted in a flexible price environment, we also present implications of our model for a sticky price environments. The source of the explicit gains from trade in our setup derive from assuming that in the short run workers are not perfectly mobile across all sectors of the economy. We provide evidence from the PSID in support of this modeling assumption.


Paul Beaudry

University of British Columbia

Franck Portier

Toulouse School of Economics and CEPR


26.05.2011 | 16:00-17:30


ZEW, L 7,1 D-68161 Mannheim