Production Structure and Multiple Equilibria - A DSGE Perspective

Abstract

This paper integrates the Austrian school’s production structure theory and financial market theory, considers the impact of heterogeneity of firms’ production cycles on economic fluctuations, constructs a DSGE model that incorporates production structure, and uses the model to analyse the existence of multiple equilibria and endogenous financial economic cycles. Compared with previous DSGE models, this paper highlights the asymmetry of firms’ responses due to the existence of different production cycles and considers emotional shocks as the main source of economic volatility, as Keynes’ “animal spirits” suggest.