| Sumario: | In contrast to recent ‘neo-Schumpeterian’ models, which argue that business cycles are good for growth, we develop a ‘neo-Keynesian’ model, where monopolistically competitive firms set prices and produce output in advance of the realization of (stochastic) monetary velocity. In such a setting, there is an asymmetry in the effect of business cycles on income: recessions are bad, because the representative firm is demand-constrained and its unsold output is wasted, but booms are not good, because the firm is output-constrained and cannot produce any more output. A more severe business cycle thus reduces the expected income of a firm, and the expected return to investment, which reduces the growth rate of the economy. (JEL E32, E52, O41, L13). Reprinted by permission of Western Economic International 7400 Center Ave., Ste. 109, Huntington Beach, CA 92647–3039, USA Ph. 1–714–898–3222, Fax 1–714–891–6715 E-mail info@weainternational.org http://www.weainternational.org
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