New Perspectives on Business Cycles.

• Author: Atesoglu, H. Sonmez

According to Professor Das's book, inequality of wealth and income and heterogeneity among economic units can lead to business fluctuations. He notes the failure of the dominant business-cycle theory, which emphasizes shocks, to find an external shock to account for the most recent recession in the United States. His approach emphasizes the internal workings of the economic system in generating fluctuations and abandons the representative-agent modeling in favor of heterogeneity. He is also able to provide empirical evidence supportive of his hypothesis that income distribution is a determinant of business fluctuations.

The first part of the book contains theoretical models revealing how heterogeneous agents and distributional changes can lead to business fluctuations in an economic system. A series of models which demonstrate output changes from the supply side are discussed. This discussion includes capital-accumulation models where households are heterogeneous in terms of their time preference. In addition to the supply side models two Keynesian, demand-oriented models with nominal rigidities are discussed. These models indicate the possibility of fluctuating behavior of output due to heterogeneity and inequality.

The theoretical part of the book also contains a discussion of distributional changes in financial markets. It is shown that an increase in inequality increases the demand for money and stocks. The theoretical discussion ends with a consideration of distributional changes for the stability of the banking system. It is shown that an unequal distribution of savings can lead to a rise in the proportion of risky to riskless assets held by banks, increasing the chance of bank failure.

The book has two empirical Chapters that complement each other. The first Chapter contains a discussion of data available on distributional changes in the United States and some European countries. For the United States, the findings indicate a negative relation between innovations in income inequality and real GNP, and they are supportive of Das's view that the interaction between distributional changes and aggregate output is a determinant of business fluctuations.

The second empirical...