DP14964 Business Cycle during Structural Change: Arthur Lewis' Theory from a Neoclassical Perspective

Author(s): Kjetil Storesletten, Bo Zhao, Fabrizio Zilibotti
Publication Date: June 2020
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Programme Areas: Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14964

We document that business cycles change during the process of development. In countries with large declining agricultural sectors, aggregate employment is uncorrelated with GDP. During booms, agricultural employment declines even though agricultural labor productivity increases relative to other sectors. We construct a unified theory of business cycles and structural change consistent with the stylized facts. The theory focuses on the simultaneous decline and modernization of agriculture. As capital accumulates, agriculture becomes increasingly capital intensive as traditional agriculture is crowded out. We estimate the model and show that it accounts well for both structural transformation and business cycle fluctuations in China.