A Simple Quantity Adjustment Model of Economic Fluctuations and Growth

This paper analyzes a new model of economy with several sectors which face quantity constraints, and show that business cycles and growth are present in this simple model. The sizes of sectors either increase or decrease stochastically, depending on the signs of the sectoral excess demands. We assume that allocation of resources is not instantanesous, and rely on the notion of holding time of continoustime, discrete-state Markov processes to select the sector that changes its size. Not only the output of this model fluctuates, but also, and more importantly, the level of the aggregate economic activity depends on the pattern of demands of the sectors of the economy. The greater is demands for high productivity sectors, the higher is the expected values of the model outputs.